BEXL CAPITAL

An Introduction to Digital Assets

Aug 06, 2021

AN INTRODUCTION TO DIGITAL ASSETS

digital assets

When the term digital assets were first used, they were used to refer to items like videos, images, and audio. However digital assets are taking on a whole new form with the emergence of blockchain technology, and this new class of digital assets is popularly known as crypto assets and they are probably the most significant investment opportunities available today.

There is a common misconception about what exactly the term crypto assets mean, when the term Cryptoassets is mentioned what comes to the mind of a lot of individuals is bitcoin and cryptocurrency. Although this perception is not wrong, it does not entirely cover the full range of what exactly crypto assets are.

The evolution of crypto assets began in 2008 with the development of the Bitcoin blockchain by a mysterious Satoshi Nakomoto. As at then, it was mainly attractive to diehard technologists and most members of the society had barely heard about it or cared about it. When interest eventually began to build in bitcoin, additional crypto assets began to develop such as Ethereum, Litecoin, and Namecoin. As early as 2016, some businesses began testing the application of the blockchain technology, also in 2019 alone, it was estimated that $2.9 billion was invested into blockchain technology. In 2021 full-scale use of blockchain technology by big companies like airline giants Boeing, Honeywell, IBM, Samsung, Microsoft, and VISA is driving a seismic shift to the crypto world. Also, individual use of blockchain has increased significantly since 2017 by close to 400%.

network of computers

So that begs the question, what are crypto assets?

Cryptoassets are cryptographically secured digital representations of value that can be transferred, stored, or traded. Crypto assets differ from other financial "assets" in the sense that they exist without a centralized authority such as a bank to monitor, approve or store the transactions, instead, crypto assets are stored on the blockchain hence making them decentralized. This is due to the decentralized nature of the blockchain. The way the blockchain operates no one has to know or trust anyone else. Also, blockchains are not operated by any singular entity, but rather by a series of computing rigs that may be located around the world. Transactions on the blockchain are uploaded to an open ledger and once a transaction has been recorded on a blockchain, it can’t be altered or deleted.

A crypto asset is a digital asset that is secured by cryptography, which makes it nearly impossible to counterfeit. A defining feature of crypto assets is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

There are several classes of crypto assets, the most popular being cryptocurrency. However as earlier mentioned it comprises more than just cryptocurrency. The following are various types of cryptoassets;

  • Cryptocurrency: it is quite easy to guess why it is first on the list. Cryptocurrencies are digital currencies that use blockchain technology to encrypt, regulate, and verify the transfer of funds between people. The first and most well-known cryptocurrency is bitcoin (BTC), however today there are thousands of other cryptocurrencies with different functions and specifications they are known as Altcoins. Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.

  • StableCoins: the value of a cryptocurrency is largely driven by the varying perceptions of the intrinsic value of the cryptocurrency hence the prices of cryptocurrencies tend to fluctuate making it volatile. Stablecoins are digital currencies that are pegged to an already established currency and are designed to reduce the level of volatility that is prominent with various other cryptocurrencies. For instance, Tether (USDT) is a stablecoin that is backed by the U.S. dollar. Some stablecoins are backed by commodities instead of fiat currency, like Digix (DGX), which operates by the gold standard.

  • Utility Tokens: Utility tokens are used in the operation of a blockchain service. They are typically made to serve some kind of purpose within the blockchain and/or give users access to particular services or voting rights. They can be used when a company wants to create a coupon that can be exchanged in the future for access to its services. This is used as a strategy to obtain financing for a project, due to this, utility tokens are often surrounded by a lot of hype and speculation. STORJ is a very good example of a utility token as it allows one to pay for using the decentralized cloud storage service it provides.

  • Crypto Collectibles: a crypto collectible is a cryptographically unique, non-fungible digital asset. Crypto collectibles are a form of digital art that can be authenticated as an original through blockchain technology.; There are many blockchain projects out there that involve the exchange of digital items, the value of which is determined by rarity such as cryptopunks, cryptokitties, and axie infinity. Many crypto-collectibles or "non-fungible tokens'' are working with the ERC-721 standard on the Ethereum blockchain.

  • Security Tokens: A security token based on blockchain technology is not to be confused with the security token that you need to access a sensitive network system such as a bank account. Also called an “investment token” or “equity token,” in the realm of blockchain technology a security token is a cryptographic token that is tied to a securities offering. Security tokens are similar to utility tokens but they are often used in the process of crowdfunding a new cryptocurrency or blockchain project. A security token represents a stake in the project and often comes with an expectation of profit in the future. Token holders can be given benefits such as voting rights, profit shares, and dividends. Because of this, security tokens are subject to certain federal security regulations.

  • Hybrid Tokens: Hybrid tokens as the name implies are a combination of the functions of a security token and a utility token. A hybrid token can be valued for both investments and practical uses on a platform. They are useful for investors who hold for speculative value and participants who want to become users of a product or service.

  • Privacy coins: cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistle-blowers or activists living under repressive governments. Some cryptocurrencies are more private than others. Privacy coins are a class of cryptocurrencies that include extra layers of security(encryption) to keep data from transactions private. However, privacy-oriented coins such as Dash, Monero, or ZCash, and are far more difficult to trace. Privacy coin owners will remain anonymous alongside the amounts in their wallet and their transaction history.

This list is not exhaustive because as we speak, the crypto asset ecosystem is still evolving. One way to better understand crypto assets is to get to know more about their purpose. The organizations choosing to issue crypto-assets have specific goals and purposes. Every crypto asset has a project behind it and understanding the project would help in understanding the crypto asset. The purpose of crypto assets such as bitcoin was to be a “peer to peer electronic cash system”. Some emerging crypto assets have proven to be quite innovative, for instance,

Ethereum enables the deployment of smart contracts and decentralized applications (dapps) to be built and run without any downtime, fraud, control, or interference from a third party. Some others are created with the intention to solve real-life issues such as utility coins like STORJ and Filecoin that aim to solve the issue of decentralized cloud storage, ICP also aims to create a decentralized internet. The value of a crypto asset depends on the company issuing (through an ICO), the media coverage, and the secondary market. Some crypto assets are meant to be quite rare with a limited supply.

For example, Bitcoins code limits the total number of bitcoins to a capped supply of 21million. Other criteria that have effects on the value of crypto assets are quantity, liquidity, staking, and use case. By choosing the specificities, the organization creating the crypto asset might have some responsibility in defining what category it fits in. Cryptoassets hold value in the following ways:

  • Payments: It can be used to make transactions such as buy goods or services without requiring a trusted third party to complete the transaction.

  • Value Storage: Since the total supply of most cryptoassets is finite, the limited supply influences their value.

  • Stable coins: Cryptoassets can be attached to commodities such as gold or oil or currencies, such as the USD.

  • Privacy: The technology that crypto assets are built on security that can allow users and owners to remain anonymous during transactions.

  • Digital Access and Inclusivity: Even people who have no access to traditional banks can enter the financial system with the help of cryptoassets.

The recent popularity of cryptoassets in the world of finances is already causing a gradual but powerful shift from the conventional financial system. One of the reasons for the increasing popularity of, and people’s increasing interest in, crypto assets, lies in the fact that the technology that forms the backbone of crypto assets promises more financial inclusion compared with legacy finance. Also, crypto assets appeal more to the younger generation that would soon become major drivers of the world economy. The popularity of Decentralized Finances (DEFI) over the past few years is due to the fact that it has proven to be a better option than the old financial systems dictated by centralized authorities. Due to its decentralized nature, the changes that will be occasioned by crypto will be on a global scale and it seems inevitable that the global economy will have to accept that crypto assets, and the technology behind it, is here to stay.

###REASONS TO INVEST IN DIGITAL ASSETS

  • To Diversify Your Portfolio: Portfolio diversification is the process of investing your money in different asset classes to minimize the overall risk of your investment portfolio. The fundamental purpose of this is to minimize your overall risk in your investments, by diversifying, all your investments would not uniformly be affected by the same market events. Because cryptoassets do not correlate with other assets, such as bonds and stocks, investing in cryptoassets is a clever way to establish yourself as a successful and innovative investor in today's dynamic and constantly changing world of finance.

  • The Future of Cryptoassets Seems Bright: One thing is evidently clear from the history and study of crypto assets and it is that the future of crypto assets is very promising. While we all know that crypto assets are highly volatile, investing in crypto assets can be a safer and more promising alternative compared to other asset classes. Also, blockchain is poised to be the technology that will drive the future, and most programs that run on the blockchain use cryptoassets to incentivize their platforms.

  • Cryptoasset Investment Can Lead to High Returns: Perhaps the main motivator for people to invest in cryptoasset is the possibility to make a profit. Like it or not, money makes our world spin and is one of the main reasons to invest in cryptoassets. Though crypto trading is relatively new, cryptoassets can lead to higher returns compared to other assets, such as stocks. Cryptoassets are highly volatile, which means that one can potentially achieve high returns from a single trade or investment. At the same time, let’s not forget that volatility also means that traders can lose it all in a second. So always consider potential risks! As crypto asset investing can be highly demanding, one of the first steps to success is to educate yourself on the asset class and devise an effective risk management strategy to limit losses.

  • Increased Adoption from Institutional Investors: More and more financial institutions are creating a position for cryptoassets as part of their portfolio. This is a major factor for bitcoins recent price increase. Not only do institutional investors create a big buyer in the market, but they also effectively remove a supply of bitcoin from trading. Bitcoin has a fixed lifetime supply cap of 21 million coins, and miners mint just 6.25 new bitcoin about every 10 minutes after the last halving event about a year ago. Earlier this year, institutions were buying up supply more quickly than it was created, resulting in a surge in price for coins still in circulation. The more institutions adopt cryptoassets the sooner cryptoassets become a widely recognized asset class.

What cryptoassets have introduced is a totally new asset class from what the traditional world offers. Initially, it was gold and silver, then it was fiat currency followed by other asset classes like stocks and bonds. The issue with fiat currency is that it is controlled by a central authority and the people in possession of that authority always want to change rules to strengthen their power over the economy and the people. This is part of what led to the abolishment of the gold standard and the introduction of unlimited printing of paper money. What the introduction of cryptoassets presents is the secure democratization of money and finances through decentralization. The utilization of blockchain technology also eliminates the need for third parties while conducting transactions thereby providing a safer and quicker means of transacting.

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