Digital assets are the latest buzzword in the fintech world.
But just like ‘Blockchain’, the term ‘Digital Assets’ is grossly misused. A comprehensive understanding of digital assets, their implication, and their role in transforming how we invest in the future is a must.
That brings us to the question – What are digital assets?
Understanding Digital Assets
The story of digital assets began with Bitcoin way back in 2009. The underlying technology used was the fundamental backbone of creating and transferring digital value, minus the middlemen.
Many years down the line, Ethereum introduced its asset management platform in 2015, which subsequently evolved into one of the largest blockchain ecosystems in the world.
It was the starting point for a digital asset ecosystem.
What are Digital Assets?
In investing, digital assets are electronic data files, which individuals can own and transfer, use as currency to transact, or to store intangible content like videos, contract documents, and computerized artwork
The assets come in either physical or non-physical forms and are digital representations of the rights or values, neither the central bank nor public authority issues or guarantees. It means digital assets do not have the legal status of a currency.
However, legal individuals or businesses may accept digital assets as a medium of payment or exchange. You can use them for investments too.
Today, digital assets exist on a blockchain as cryptocurrencies or security tokens stored in digital lockers. You can transfer, warehouse, and exchange them electronically.
Importance of Digital Assets
Digital assets may become “very important” or “somewhat important” to several key industries in the next three years, as revealed by 89% of respondents in the Deloitte Global Blockchain Survey 2020.
Digital assets have found their footing and are here to stay. They are representative of a massive part of Blockchain’s enduring sustainability. Moreover, digital assets today play a critical role in simplifying, viewing, and certifying an asset’s historical provenance.
They can convert otherwise undividable physical assets to dividable assets to trade on secondary markets. The opportunities for implementation are endless.
Moreover, 83% of respondents from the Deloitte Global Blockchain Survey 2020 believe that digital assets will act as surrogates or robust substitutes for physical currency in five to ten years.
This is because digital assets offer,
Greater Liquidity: Digital assets can unlock the investing opportunities for assets too illiquid to invest in previously. Investors, especially, retail investors, can benefit from access to asset classes and risks that would have been beyond their capacity before.
Moreover, investors can also use digital assets to buy a fraction of a peer-to-peer traded stock. It enables them to participate in the capital markets with lower minimum tickets or portfolio sizes.
Transaction Cost & Speed: Digital assets with their underlying blockchain technology can cut down on an estimated 40 – 80% of transaction costs for cross-border payments. By removing intermediaries and infrastructure, the time and cost savings across different stages of the asset lifecycle can be substantial.
Transparency and Accessibility: Digital assets come underpinned by distributed ledger technology. It means transactions must be performed and recorded in a tamper-proof ledger.
Digital assets are autonomous. So, investors are not at the mercy of certain trading hours or limited due to a controlling centralized entity. Holders of digital assets have complete control over them and are free to do what they please, at any time they want to.
Deployment of Digital Assets in the Real World
Many countries now accept digital assets around the world. The objective is to streamline cross-border transactions to ensure easy and fast issuance of new securities like bonds, fund shares, and possibly stocks in a few years.
Here are some examples that highlight the deployment of digital assets in the real world:
Germany has begun developing digital assets specifically for its real estate sector. Companies like Finexity and Exporo let retail investors invest in real estate with as little as EUR 5000 in digital assets. Investors can divide the funds among several different objects facilitating diversification of their investment.
On the other hand, the Swiss Stock Exchange launched its blockchain-based exchange SDX in 2021. It is currently consulting the Swiss Federal Council and considering upgrading its legislation to accommodate digital exchanges by creating a new category called DLT trading systems. This change would allow multinational companies to have a digital version of their shares to trade on their digital exchange.
Another example of a digital asset in the financing industry is leasing. Some businesses have made industrial goods like industrial plants, machines, and tractors investable and available to retail investors. It has allowed industrial equipment manufacturers to continue production without capital limitations. Companies using these machines no longer buy equipment at large upfront costs; instead, they pay for their use. Such a system is called pay-per-use. Investors finance the initial purchase of the machine through digital assets and then earn returns every time companies use it.
Roadmap for Retail Investors
Since its inception, Bitcoin has hit a consistent CAGR of 100% to 200% a year. The Cryptocurrency Mining Market has recorded a healthy CAGR of 29%, and the market may hit US$ 529.39 billion by 2028.
Undoubtedly, there is massive demand with such astronomical returns. Cryptocurrencies could be the future of investing. But, from an investor perspective, the digital asset class is still at a nascent stage. Decentralized protocols, utility tokens, and non-fungible tokens are just scratching the surface; there will be more categories. Most importantly, it is subject to enormous market volatility.
In other words, you may lose a lot before you make some significant gains in your digital assets.
So, take a long hard look at your financial plan, which will help you reach your life goals. Then decide if investing in digital assets is worth the risk.
Read more: How Long-term investing helps create life-changing wealth – TOI.