ELI5: Are cryptocurrencies considered digital assets?

A lot of newbies ask what a digital asset (DA) is, exactly.

In this ELI5 article I’ll take a look at DA’s and how they’re related to cryptocurrencies.

Digital Assets

A digital asset is anything that has value and which can be stored in digital medium.

An MP3 song that you purchase via some online store is a digital asset.

A nice photo that you took using your camera is a digital asset.

You may ask then, is any kind of content stored in digital media considered an asset? Well, no. To be an asset, it must have some value.

For example, virus that lives on your hard drive is not a digital asset. Quite the contrary, it’s a digital liability.

Irrelevant or useless files containing no value aren’t necessarily assets, but they could be, depending on context.

For example, useless files may become assets to a forensic police officer who could be looking for crime evidence in a computer system. Then, what would usually be considered irrelevant files, could become valuable somehow.

Which brings us to another important point about digital assets: their value depends on context.

A seemingly worthless file could prove to be gold to someone else, in a different context.

Kinds of Digital Assets

In day to day use, when we refer to digital assets, it usually refers to one of these:

  • Movies
  • Music
  • Software (Games, Office Software, etc)
  • Books
  • Cryptocurrencies

Digital Value

The common sense meaning of digital asset usually means something you bought and downloaded online. A game, music, movies, software and so on.

But, as we’ve just seen, the concept is much broader, and depends on context.

“Value” is not always directly tied to the amount of money paid for the asset, but can be related to its utility to the user at a given moment in time.

This can be easier to visualize if we ask ourselves a simple question: “would I pay for that useless file in order to save my hard drive?”.

Wait! If the useless file can now be used to save your data, then it’s no longer useless! If your hard drive were to be lost if you couldn’t access that file, like some mundane log file that you would usually ignore, then the file has suddenly acquired value. You’d definitely pay for it now.

In this context, the log file is a digital asset.

As you sen see, the definition of digital asset is a bit more abstract than just digital stuff you buy online.

Cryptocurrencies

Cryptocurrencies are a kind of digital asset.

They’re usually called crypto assets, which is short for cryptocurrency-related digital assets.

Bitcoin is the most popular, and currently also the most valuable, crypto asset.

But several other crypto assets have been developed since Bitcoin appeared in 2009, in fact thousands of currencies exist and have multimillion dollar (possibly fake) market capitalization.

ICO Tokens

For example, ICO tokens are coins that live inside a smart contract in another coin’s blockchain. They’re one of the most popular digital assets that were introduced after Bitcoin.

Tokens represent value in a startup project, or established organization, that has decided to raise capital using the ICO crowdfunding system. The tokens may, or may not, be securities. For the purpose of this article it doesn’t really make a difference.

Tokens are a kind of digital asset that gains or loses value according to the performance and achievements of the organization backing it or the project in which the tokens can be used.

Decentralized Digital Fiat Money

Bitcoin, on the other hand, has no centralized commercial organization behind it.

Its monetary value derives solely from investor’s expectations, its scarcity and, therefore, basic supply and demand.

It’s like most fiat currencies in that respect: Bitcoin, like the US dollar or the Euro, has no intrinsic value.

Bitcoin is a revolutionary new kind of money, which is what drives investors to it, not the market performance of a given institution. The latter would probably be considered a security and would be subject to securities regulations. Bitcoin isn’t a security, it’s a completely abstract kind of digital asset with absolutely nothing backing it besides trust and speculation.

ICO tokens and coins, therefore, serve very different purposes and are different categories of crypto assets.

Conclusion

Digital assets include anything that has value and which can be stored in a digital medium.

Crypto assets are part of a category of digital assets which include cryptocurrencies which, themselves, can be categorized into several different types such as ICO tokens, standalone blockchains, complementary cryptocurrencies and others.

I hope you’ve found this introduction to digital assets useful and now have a better idea of the relation between popular cryptocurrencies, such as Bitcoin, and other kinds of digital assets.


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