Insights

All are familiar with typical assets. The ones that are either physical assets such as a home, car, or even paper assets that represent the ownership or partial ownership of an asset or company. Today, as the digital age progresses, the way we invest is digitizing, as well. In this two-part article, we will cover how digital assets the future of investing and how to manage digital assets once you have them. Alpen Partners International believes that every investor should consider keeping up with these emerging trends. In part one of this article, we take a look at cryptocurrency and the tokenization of physical assets. In part two, we cover crypto and token banking. For more information on the digitization of wealth, investing in digital assets, or how you can get in front of fintech trends, contact Alpen Partners International below.

Cryptocurrency and Tokenization

Before diving into tokenized assets, we need to give credit where credit is due. Tokenization would not exist without cryptocurrency, decentralized currency that is represented by tokens. For a more in-depth look at cryptocurrency, read our article about the origins and basics of crypto. There is so much buzz around crypto and so much to learn. For more information about cryptocurrency, read our introduction to the cryptocurrency page. We also have a cryptocurrency vocabulary list where you can learn all of the words associated with cryptocurrency. Once you get involved with digital money, you will also need to know how to stay tax compliant. For this, we have gathered some tax laws from around the world regarding cryptocurrency. Cryptocurrency is based on blockchain, the digital, public ledger where trading and mining take place. Through a blockchain, everyone in the network can see every account balance. Every transaction includes a file with a sender, recipient public key, and the number of coins involved in the transaction. The transaction is sent with a private key by the sender in the form of cryptography. A blockchain is decentralized and is growing with completed blocks. The most recent transaction is added in chronological order, which allows the blockchain participants to keep track of the transactions without central recordkeeping. Developers who are interested in the advancement of financial activity are pushing the digitization of real-world assets and placing them on blockchain to take advantage of the perks that cryptocurrencies hold while also keeping the characteristics of the asset. Tokenization works by taking an asset and converting the rights of a hard asset into a digital token. For example, pretend there is a $500,000 home. With tokenization, the home can be transformed into 500,000 tokens. The number of tokens is arbitrary. This means that each token stands for a .0005% share of the asset in questions. The tokens would then be issued on a platform that supports smart contracts so that the token can be bought and sold freely on different exchanges. Buyers can own as many shares, or tokens, as they want. If they buy all the tokens, they’d be the owner of the asset but not the legal owner. This is why blockchain, as a public ledger, ensures that ownership of the tokens cannot be erased — this is why blockchain is necessary for this kind of service. The securitization of non-liquid assets is already becoming of the top stories of 2019, and it isn’t expected to go away. Tokenization is reshaping the way investors will value their assets and how they will be purchased from now until the end of time. This is all thanks to cryptocurrencies and blockchain.

Why is there a push for tokenization?

Popular assets like stocks, real estate, carbon credits, oil, and gold can be difficult to physically transfer or subdivide, leading buyers and sellers to utilize paper trading that represent some or all of the asset. Paper trading can be complicated, with legal agreements that can be hard to track. One way to combat this process is by switching to a digital system. Digital systems allow commodities to be traded without the use of paper but can come with a hefty overhead and relies on trusted participants. Fintech developers, major financial companies, and startups are all switching their gaze to asset tokenization. Security and ease is the first benefit of tokenizing hard assets. Many are asking why they should be tokenizing their assets. The main reason to tokenize is that it makes it easy to subdivide stocks and sell fractional pieces of a commodity to multiple buyers. If you take a commodity, such as gold or diamonds, physically purchasing the investment can be a lengthy process, with verification, secure transportation, and storage.  With a token, trading commodities, whether partial or whole, is much easier, with the added benefit of blockchain security. Another reason tokenization can be beneficial is buying or selling a fraction of an asset. For example, if an investor wants to diversify their portfolio with a real estate investment, but their initial investment isn’t enough to purchase a whole property, tokenization would allow them to purchase a fraction of an asset, and then continue to purchase more as they feel comfortable. On the opposite end of a transaction, a seller may be in need of funds, but they don’t need the entire cost of a property, through tokenization, they can sell a token of the property. Additional benefits include 24/7 markets, low transaction costs, greater liquidity of asset owners, automated quicker settlement, and improved compliance checks. Blockchain tokens can represent real-world assets and allow investors to democratize ownership of various asset classes. It can be used on any non-liquid assets; venture capital funds, real estate, precious metals, currency, art, sports teams, and beyond! Now that we have a basic understanding of crypto and tokenized assets let us take a look at where these digital assets are held. All investments involve certain risks. All investments carry the potential for financial loss, including the loss of the principal amount invested. Past performance should not be viewed as an indicator of future results. Market conditions and broader economic factors can significantly impact the value of investments. Investments in international markets are subject to additional risks, such as currency exchange fluctuations, political or economic instability, and variations in accounting practices. Alternative investments, including but not limited to hedge funds, private equity, and real estate, may be illiquid, speculative, and are not suitable for all investors. The above information should be considered before making any investment decisions. All posts and publications are for your information only and are not intended as an offer, promotion, or solicitation to buy or sell any financial instrument or perform any other financial transactions. All information and opinions expressed in posts and publications reflect our current views as of the date of the publication and may be liable to change without notice.