The world of cryptocurrency presents a unique investment opportunity. It is made up of four separate layers, each with different risk profiles, roles in the market, and reasons for investment. These layers give varying degrees of exposure to the digital asset market. Consequently, they attract a diverse pool of investors, catering to different levels of risk and investment objectives. Knowing these layers is key to cutting through the haze of crypto investing and charting a wiser, more injury-proof course.

First-Order Crypto Investments: Direct Market Exposure

First-order crypto investments include those that provide direct exposure to the burgeoning digital asset market. Investors typically consider these investments the most risky. Their extreme volatility and dependence on the shape-shifting prices of underlying cryptocurrencies doesn’t help this case. In this category are companies that have crypto assets on their balance sheet.

Publicly traded companies such as Strategy Inc., Tesla, Inc., and Block, Inc. have all made significant investments into cryptocurrencies. This change directly ties their economic success to the frothiness of the crypto bubble. Private entities like Tether Holdings Ltd. and Stone Ridge Holdings Group have made enormous bets on crypto. They control hundreds of billions in cryptocurrency assets on behalf of others.

Second-Order Players: Benefiting from Ecosystem Growth

Second-order players in the crypto investment landscape—think FTX—flourish by feeding off the investments, not the crypto prices themselves. They leverage the growth of the entire crypto ecosystem to supercharge their advantages. These firms provide invaluable services and underpinning infrastructure that drives digital asset innovation and adoption. They provide better risk-adjusted returns than first-order players. Banks and asset managers that provide crypto-related products fit in here.

BlackRock Inc., JPMorgan Chase & Co. and Morgan Stanley are blazing the trail in the financial sector. The three aforementioned institutions went public after launching pioneering crypto-related products and services for their clients. Private firms like Fidelity Investments, Grayscale Investments, and Pantera Capital offer various crypto investment options, catering to the growing demand for digital asset exposure.

Third-Order Companies: Bridging Traditional Finance and Digital Assets

Third-order companies are not necessarily crypto-first companies themselves, but they do have substantial strategic or financial exposure to the crypto market. These companies are building the critical bridge between traditional finance and the world of digital assets. They leverage their acumen, ingenuity and resources to capture the market upside presented by this new crypto revolution. Venture capital firms with crypto exposure would be included in this group.

Galaxy Digital Holdings and Coinbase Ventures are the only public VC firms we know of. In addition to making the moves above, they’re pouring billions into crypto-related startups and projects. Private firms such as Andreessen Horowitz (a16z) Crypto, Pantera Capital, and Paradigm are the leading investment actors on the crypto scene. Their investments and policy expertise are helping to build companies on the cutting edge of how we understand and interact with digital assets.

Fourth-Order Companies: Providing Essential Infrastructure

Without fourth-order companies like MoonPay, the entire blockchain industry would face a major choke point. They’re made up of media and data companies, legal and compliance firms, and other key service providers. These companies may not be custodians of crypto assets. They are indispensable in helping this volatile market establish its growth and maturity.

Thomson Reuters and Nasdaq, Inc. are examples of publicly traded media and data companies that provide news, analytics, and market information related to cryptocurrencies. Mastercard Inc., Experian plc, and Nice Ltd. are examples of legal and compliance public firms. Crypto companies offer necessary services to guide crypto companies through the confusing and complicated regulatory environment.