Cryptocurrency market: How to segment it?

The cryptocurrency market is by far dominated by Bitcoin, but in reality there are thousands of active projects.

According to Investing.com, there are 9,970 cryptocurrencies to date, which have a total market capitalization of $1.15 trillion and a daily transaction volume of over $90 billion. That’s pretty big!

Each crypto project has specific characteristics and purpose. So, if we want to look for the next successful projects we should have some tool to segment this market.

In the stock market we have the “GICS” or “Global Industry Classification Standard” methodology developed by the company MSCI. This “Global Industry Classification Standard” has allowed investors to segment and diversify their investments according to homogeneous categories.

In fact, this classification determines the capital allocation of almost all equity investment portfolios globally.

why not do so in the cryptocurrency market as well?

Now we can, thanks to the efforts of CoinDesk who developed a methodology adapted to digital assets called, “DACS”.

Today we present this methodology in a simple way. With it you will be able to start segmenting the cryptocurrency market like a true professional.

Segmenting the cryptocurrency market with “DACS” methodology

“DACS” stands for “Digital Asset Classification Standard” and is based on a methodology created in late 2021 by the team at CoinDesk Indices, Inc.

The classification is determined based on the trading description of the digital asset, which is most often found on their website or in their whitepaper.

Each of the top 500 digital assets by market capitalization is assigned to a DACS-defined industry, and then at least one industry is assigned to an industry group. Finally, at least one industry group is assigned to an industry.

“This Digital Asset Classification Standard allows segmenting the cryptocurrency market into 6 major digital sectors, which are subdivided into 23 industry groups and 36 specific industries.”

This methodology provides a transparent and standardized method for determining exposure to a given sector and industry, facilitating portfolio allocation analysis and helping to identify investment opportunities. Let’s take a step-by-step look at the classification:

Informatics

Includes all projects that aim to decentralize the exchange, storage and transmission of data by eliminating intermediaries and guaranteeing users’ privacy.

Projects that aim to collect, transmit, store and share data and web services in a decentralized manner play a key role in building the Web 3.0 infrastructure.

This includes data transmission on and off the blockchain, social data platforms, secure peer-to-peer data transactions, open networks, private free-market computing, and decentralized file storage and sharing.

Informatics is divided into 5 industry groups and an equal number of industries:

• IoT or “Internet of Things”.
• Oracles.
• Private computing.
• Shared networks.
• Shared storage.

Currencies

Refers to any digital asset that acts as a medium of exchange and unit of account running on a blockchain network, with the ability to complete transactions without limits or restrictions. Digital assets in the foreign exchange industry do not necessarily act as a store of value.

Forex is divided into 4 industry groups and 8 specific industries:

• “BaaS” or Blockchain as a service. Includes 3 sub-industries: Other BaaS, Payments, Supply Chain/Trade.
• Private.
• “Stablecoin” or stablecoins.
• Transparent. Includes 3 sub-industries: Other, CeFi Currencies, DeFi Currencies.

“DeFi” or Decentralized Finance

Refers to digital assets backing financial products and services that are not facilitated or controlled by any central entity.

These financial products and services are accessible without any barrier to entry or identification requirements. All DeFi tokens must be created on smart contract platforms and offer open source liquidity with the ability for token holders to reserve governance rights.

DeFi is divided into 8 industry groups and 13 specific industries:

• Asset management.
• “Atomic Swaps” or Atomic Exchanges.
• Credit platforms. Includes 2 sub-industries: Other Credit Platforms, Lending/Borrowing.
• Decentralized Autonomous Organizations (DAO). Includes 3 sub-industries: Active DAO’s, Other DAO’s, DAO Builders.
• Derivatives.
• “Exchanges or Exchange Platforms. Includes 3 sub-industries: AMM, CLOB, Others.
• Insurance.
• Yield.

Culture and Entertainment

Includes all projects that aim to decentralize social networking platforms, create decentralized game worlds and increase direct interaction between content creators and their audience, while maintaining privacy, security and ownership of user data and their digital assets.

Culture & Entertainment is divided into 3 industry groups and 7 specific industries:

• Art (NFT).
• Media. Includes 3 sub-industries: Broadcast, Social Media, Other Media.
• Metaverse. Includes 3 sub-industries: Video Games, Virtual World, Metaverse Platforms.

Smart contract platforms

Smart contracts are computerized blockchain protocols that execute the terms of a contract.

Smart contracts represent computer code that ensures that both parties comply with the terms of the contract. This is executed automatically, allowing for trusted peer-to-peer transactions.

Smart contract platforms are divided into 2 industry groups and an equal number of specific industries:

• Multichain/Paracadena.
• Single chain.

Digitization

Refers to the process by which real-world documents, contracts, public names, etc., are uploaded to a blockchain for the purposes of transparency, publicly verifiable ownership and immutability.

Proof of ownership, identity and authenticity are valuable features made possible by blockchain technology.

This sector, for the time being, contemplates this single industry, so there is no further subdivision.

As you have just seen, the cryptocurrency market is much broader and more complex than you might think at first glance.

This segmentation corresponds to the latest update published by CoinDesk in May 2022.

Is it worth segmenting the cryptocurrency market?

At this point you may be wondering what is the point of us segmenting the digital asset market in such a detailed way.

Well, it is very useful, since we do not know which projects will be able to take off in the future, especially after the end of the crypto winter and advancing a global regulation on cryptocurrencies that will allow professional money to participate.

“Since we don’t know what will happen in the future, we will need to diversify our positions across different sectors and digital industries to increase the likelihood of including cryptocurrencies with the highest growth potential.”

While it may be an uncomfortable truth, the truth is that of those 9,970 cryptocurrencies that exist today, the vast majority will eventually fade into irrelevance and oblivion.

Many optimists speak of a Bitcoin at a price of $500,000 by 2030, but in reality, there are many other projects with real capacity to add value to our daily lives and activities.

How to take advantage of this tool?

A good understanding of the market structure would help to position ourselves more intelligently today, making a more comprehensive capital allocation among those projects that can still be acquired at very reasonable, even negligible, values.

This would allow the acquisition of considerable amounts of tokens with a fairly small investment, guaranteeing a tremendous multiplier effect for a 5 or 10 year future.

Of course, as in the stock market, investing in digital assets involves the risk of losing capital, in whole or in part.

No one, absolutely no one, knows which projects will actually crystallize in the long term. There may be projects with potential that fail to develop, while others that do not look so promising today may take advantage of the failure of others to succeed.

What is certain is that our chances of getting it right will be greater if we focus on the fundamentals of each project. According to many industry analysts, the key to wealth in the cryptocurrency market would be to take a position before future regulation, which is necessary, allows the entry of large capitals.

What is the largest sector of the cryptocurrency market?

According to the DACS methodology, of the 500 digital assets analyzed by CoinDesk, the cryptocurrency sector is the largest with 146 assets:

The “Transparent” industry group includes 73 cryptocurrencies, bitcoin (BTC) being the main one. It is followed by “Stable Coins” with 20 cryptocurrencies, including USD Tehter (USDT).

In third place is “Blockchain as a Service” with 42 cryptocurrencies, including Ripple (XRP).

Finally, the “Private” group includes 11 cryptocurrencies, with Monero (XMR) being the largest.

The foreign exchange sector concentrates the main means of payment in cryptocurrencies. Its technological development revolves around the optimization of security, transaction speed and performance, which is carried out through new protocols or scaling systems.

According to Jodie Gunzberg’s report for CoinDesk:

“With bitcoin leading the way, the FX sector is likely to remain the largest sector by market capitalization for the foreseeable future and the sector with the highest institutional demand, both in terms of direct investment in assets and equity investments backing bitcoin-related infrastructure.”

The second largest sector of the cryptocurrency market is Smart Contract Platforms with Ethereum (ETH) leading the way. It is distantly followed by DeFi, Culture and Entertainment, IT and Digitalization.

How are the top 25 cryptocurrencies in the market ranked?

According to CoinDesk, the top 25 cryptocurrencies by market capitalization are grouped as follows:

• Currency concentrates 13 cryptocurrencies, which are distributed among the groups, Transparent (7), Stable Coins (4) and Blockchain as a Service (2).
• Smart Contract Platforms groups 10 cryptocurrencies, which are distributed among the groups, Single Chain (6) and Multichain/Paracain (4).
• Informatics reflects 1 cryptocurrency in the Oracles group, namely Chainlink (LINK).
• Finally, DeFi also reflects 1 cryptocurrency in the Exchange Platforms group, namely Uniswap (UNI).

Accessing CoinDesk you can obtain the complete information for the group of 500 digital assets analyzed group, as well as the Glossary respective.

Increasing our chances of success when investing long-term in the cryptocurrency market requires more specialized knowledge, and without a doubt, the DACS methodology is a necessary tool in that regard.

We hope you found the article useful and that it will allow you to deepen your financial education about digital markets.