Buying and selling hard assets can be somewhat of a hassle, logistically. Buying and selling commodities can lead to complicated paperwork and, oftentimes, buyers aren’t ready to make a large purchase right away. Fintech has changed the way we do finances completely. Tokenizing hard assets is one of the newest developments and it’s spreading rapidly. Tokenization allows buyers and sellers to sell whole or fractional assets easily on ever-developing blockchains.
The least complicated definition, without going into details, of asset tokenization is converting the rights of an asset into a token on a blockchain.
As you may know, blockchain is the digital, public ledger where cryptocurrencies occur. 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 constantly 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.
Blockchain was created by the same developer who invented Bitcoin in 2008. Since the creation of cryptocurrencies, while the digital money may not be embraced by everyone, blockchain technology has grown in popularity, along with many other financial technology innovations.
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, imagine 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 fo 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 why why blockchain is necessary for this kind of service.
The securitization of non-liquid assets is already becoming one 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.
Popular assets like stocks, real estate, carbon credits, oil, and gold can be difficult to physically transfer and/or subdivide, leading buyers and sellers to utilize paper trading that represents some or all of the asset. Paper trading can be complex, 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 they can come with a hefty overhead and rely 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 should they be tokenizing their assets. The main reason to tokenize is because 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 whole 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 give investors the opportunity 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!
While tokenization isn’t a full reality just yet, 2019 is set to be the year where developers and financial companies bring it to the forefront of our minds and change how we trade forever.
The shift we are seeing is that of a digital age. Tech-savvy individuals are seeking easy access, convenience, efficiency, and speed in every part of their lives, including their finances. Having the ability to make transactions from the convenience of a phone or other electronic platform is creating this strong push towards Fintech.
Looking beyond blockchains, we are seeing technology have a hand in simple things such as payment and holding money, and more complex life aspects like investment advising. Some companies are even developing ways artificial intelligence can assist in hedge fund managing!
No matter the problem, Alpen Partners will handcraft a solution for you. We know that there is no one-size-fits-all when it comes to financial success. Our approach involves working with our clients to make a unique plan to meet their needs. Rest assured that we will work hard to guide you through the process of meeting your financial and personal goals.
Contact us to enhance your financial plan today.