The invention of Bitcoin has led to the development of a new asset class, consisting of protocol tokens – these tokens are part of the structure of a consensus protocol and enable one to participate in its value creation. Since Bitcoin, many other consensus protocols have been created, each with its own unique use case and consensus mechanism.
Today, there are more than 5,000 protocol tokens and app coins.
And this number is continually growing as more projects are launched. However, not all of these are credible, and all warrant a closer look at the viability of the underlying project and team.
But 90 percent of the market is comprised of just three key types of protocol tokens
At this point in time, 90 percent of the USD 276 billion protocol token market comprising the Internet of Value can be categorised into three key types of assets:
a) Global, permissionless store of value, such as Bitcoin and Bitcoin Cash – these tokens function as a decentralised form of money
b) Global, permissionless smart contract platform, such as Ethereum, Tezos and Cardano – these tokens can have contractual terms embedded into them, making them ideal for the tokenization of existing assets (e.g. equity, debt etc.)
c) Global, permissioned payment network, such as Ripple (or XRP) and Stellar – these tokens provide liquidity and act as a medium for value transfer in a global payments network
Despite it still being early days in the development of consensus protocols, we already see a few tokens emerging as potential winners in the categories above – namely Bitcoin, Ethereum and XRP. These three tokens currently represent almost 80 percent of the market by capitalisation and have an outsized influence on the overall performance of the protocol token market.
Like the FAANG giants, Bitcoin, Ethereum and XRP benefit from network effects and demonstrate a possible ‘winner take all’ outcome in this space. At the same time, it is important to also closely follow the most promising “runner ups”. Protocols such as Tezos and Cardano have innovative features and are more scalable, and they are currently investing heavily in further building out their community and use cases.
What characteristics make these protocols so dominant?
As with internet and internet technologies, consensus protocols benefit from network effects and scale, which means that new participants increase the value for existing participants and the network as a whole. One example of this is the Ripple payments network, RippleNet – the more financial institutions there are participating in RippleNet, the more XRP can be leveraged to facilitate payment transactions between these institutions directly and seamlessly.
How adding digital assets can complement your traditional portfolio
The performance of Bitcoin and Ethereum over the past few years has demonstrated the significant potential for returns in the digital asset space. In addition, while being riskier, protocol tokens have a low correlation to traditional assets and can be incorporated as part of a smaller satellite portfolio to diversify and boost returns of an existing investment portfolio.
A simple, diversified digital asset portfolio can be created around holding Bitcoin, Ethereum and XRP, which represent the three main types of protocol tokens and constitute the lion’s share of the market – as well as public awareness. This portfolio can be further diversified with an allocation to other smaller, potential next generation protocols with compelling use cases, as well as dynamic funds that extract value from tactical opportunities and market inefficiencies.
At Sygnum, our product offerings have been designed with this in mind:
1. Direct access to Bitcoin, Ethereum and XRP
We offer custody, brokerage and credit services for Bitcoin, Ethereum and XRP, enabling clients to invest directly into these key protocol tokens and control the level of exposure. It is also in our roadmap to continue adding other smaller but compelling tokens to increase the options available to our clients.
2. An Index ETP which includes exposure to smaller, niche protocols
We developed the Sygnum Platform Winners Index which identifies on a dynamic basis the tokens of the most established, foundational protocols (including smaller ones such as EOS, Binance Chain, Cardano, etc.). This index has a corresponding ETP which is traded on the SIX exchange and provides a convenient, safe entry point to digital asset investing.
3. An alpha-oriented Multi-Manger Fund
Sygnum’s Asset Management team has established a multi-manager fund which diversifies across best-in-class digital asset managers and strategies. This fund provides broader exposure to digital assets including value extracted from information asymmetries and market inefficiencies in the digital asset space.
In our product strategy we have considered the various aspects of a holistic digital asset portfolio which will create maximum value for clients. We also continue to roll out more offerings which will enhance what we currently have – stay tuned for these and register for our newsletter here to receive regular updates.
This document was prepared by Sygnum Bank AG. This document may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affiliates and partners at the time of writing. The document is for informational purposes only and contains general material. It is for use by the recipient only. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analyses contained in this document have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.