Apart from the conventional asset classes, such as, equity, real estate, gold, etc., a new asset class called digital assets is evolving. Digital assets are the assets which you can buy, sell or hold online in digital form only but cannot touch or feel them. These may be called as intangible assets. This article will present an insight on digital assets, their working mechanism, how you can invest in digital assets, pros and cons of digital assets, etc.
What are Digital Assets?
Digital asset is anything that exists in digital form, which can be stored and transmitted through digital means and is associated with the right to use or ownership. The digital assets may be in the form of currency or they may be digital files which can be traded using blockchain technology. Some examples of digital assets are crypto currencies and non- fungible tokens (NFTs). Both the crypto currencies and NFTs are recorded and authenticated by blockchain technology. Although you cannot hold the digital assets physically but they are real assets which can be stored or traded online through electronic mode. Some popular crypto currencies are Bitcoin, Ethereum, Solana, Cardano and Polkadot. Non- fungible assets include artworks, domain names, digital documents, motion pictures, virtual reality and gaming items, etc. Digital assets may be stored in laptops, personal computers, tablets and other data storage devices.
Crypto currencies may be purchased or sold using cryptocurrency exchanges through the digital wallets. NFTs may also be bought or sold using digital wallets by exchanging them with crypto currencies or using other fiat currencies.
Working Mechanism of Digital Assets
Digital assets may be created in many ways and stored in digital wallets. Crypto- exchanges provide the facility of digital wallets to investors or many investors use personal software or hardware wallets made for this purpose. Every digital wallet has a unique address. Record of every digital asset is stored securely on a decentralize database, or electronic ledger called a blockchain, which is distributed among the users. Transactions made regarding digital assets are verified in groups called blocks and maintain a history of ownership of digital assets.
The wallet address is public and everyone can see the details of assets a wallet owns. However, unless the wallet owners share their identity, it’s difficult or nearly impossible to know who owns the wallet.
This mechanism enables the transfer of digital assets without the need of any intermediate party such as government or bank. This can make transaction quick and easy.
Now the question arises, from where they derive their value?
How to Invest in Digital Assets
You can invest in digital assets through various crypto exchanges. Each crypto exchange provides a digital wallet to the investor in which the digital assets may be stored and traded. The procedure of investing in digital assets is as follows:
Choosing a Platform
First you have to choose a platform where you can trade digital assets. There may be some traditionally brokers or dedicated cryptocurrency exchanges available for this purpose. These brokers or exchanges charge nominal exchange charges to buy or sell digital assets. While choosing the platform you should consider types of cryptocurrencies they offer, the exchange rates, their security features, educational resource they are providing, etc.
Deposit fund in your account
The second step is to deposit money in your account which will be provided to you by these crypto exchanges or brokers. Your bank account will be linked to these platforms and the transaction to account will have to be done online. Different crypto exchanges allow different methods of transaction. Usually the exchanges do not allow payment through credit cards either. Most of the credit card companies do not allow buying digital assets through credit cards. The currency allowed for transaction also depends on the exchange you have choose.
Placing an order
The last step is to place an order via your broker or crypto exchange. The procedure of placing the order in mentioned on the online platform of the broker or exchange. You can also sell the digital assets as per the procedure given in the platform of exchange.
Some other ways to invest in digital assets
Bitcoin trusts
You can also buy shares of bitcoin trusts with a regular brokerage account, which allow retail investment in digital assets through the stock market.
Bitcoin Mutual Funds
There are many digital assets ETFs or mutual funds which are also a food option for safe investment in digital assets.
Blockchain ETFs
Blockchain ETFs are theme based ETFs that invest in specific stocks related to blockchain companies. The companies these ETFs choose have business in blockchain technology or these companies make profit from investment in blockchain technology. Buying such ETFs is also an option to invest in digital assets.
Types of Digital Assets
Crypto Currencies
A cryptocurrency is a form of token or coin that exists digitally or virtually and uses cryptography to secure transactions. Some of the most famous cryptocurrencies are Bitcoin, Ethereum, Cardano, Solana, Tether, Binance, Litecoin, Ripple, etc. Units of cryptocurrencies are created through a process called mining, which involves using powerful computers to solve mathematical problems that generate coins.
Non- fungible Tokens (NFTs)
Non- fungible tokens commonly called ETFs are artworks or some other content available in digital form. The NFTs may be associated with photos, videos, audio or any other content. Every ETF is unique in itself and has different value. The NFTs can be bought, sold or traded in the same way as crypto currencies or any other digital asset. ETF ledgers provide a public certificate of authenticity or proof of ownership.
ETFs can be traded in large public places which are internet sites like OpenSea, NiftyGateway, Rarible, Mintable, AtomicMarket, etc. Common digital wallets which facilitate trading of NFTs include MetaMask, Coinbase Wallet, and the Ledger hardware wallet.
Pros and Cons of Digital Assets
Pros
Accessibility and Liquidity
Records of digital assets are stored on decentralized database which are available to everyone. The digital currency is versatile and is not limited by any borders. It can be transferred to other person within a very short time period and you can buy and sell them in a number of platforms available.
Highly secure
Blockchain technology is a proven technology which enables us to store the digital assets securely. The record of transaction is stored in a decentralized database and no one can temper or change it.
No interference of regulatory authorities
The digital assets are not regulated by a government or any regulatory body. This gives the owners of digital assets, an autonomy and control over their investments because the prices are not linked to any government policy.
High return
This asset class is highly volatile but at the same time it has potential to give high returns. The returns you can get from digital assets depend upon your risk taking capacity. If you have a good risk taking capacity and you are investing in a systematic manner, with a good strategy, then you can make really good returns from this asset class.
Cons
Highly volatile
As discussed earlier also, this asset class is highly volatile. Therefore, investing without knowledge and strategy may result in heavy losses. One should invest only that amount, which he or she can afford to lose.
Require some knowledge of computer
Investment in digital assets require some basic knowledge of computer. Since all transactions for this asset class are made online, therefore, you should at least, know how to browse internet, how to navigate through internet sites and how to do online banking.
No government backing
There is no government or any other regulatory authority, which regulates transection of digital assets. In case of fiat currency, the government or central bank of the country guarantees to give you value of currency you obtain. In case of any wrong transaction you can trace it and there are chances that you will get your money back. In case of digital assets, if someone hacks your account or you lose your assets due to any reason, it is very difficult to trace the transaction or to recover back your assets. Therefore, investing in this asset class is very risky.
Chances of fraud and losses
This asset class is semi- autonomous and there is no government backing. In addition to it, the global nature of this asset class makes is susceptible to fraud.
Irreversible
Digital asset transactions are anonymous and unregulated. Due to these features of digital assets, the transactions made in this asset class are irreversible and final. Nothing can be done, once a wrong transaction is made, until the person who has got the assets, return them back. Even, it is impossible to trace the wrong transaction.
There is additional risk of loss of assets. Many users keep their assets in digital wallets. If they lose access to their private keys, then the entire assets kept in that wallet are lost. If the hard drive, where you have stored your records crashes or a virus corrupts the records or your wallet, you could lose all of your assets within minutes.
Limited use
Even though, the investors and users of digital assets are growing day by day, there are few companies who accept the digital currencies. Digital currencies are still not widely accepted. Some companies, which accept the digital currencies are Pay Pal, AT & T, Due to this reason, the use of digital assets is limited and you cannot spend it as easily as you can use other assets.
Are the Digital Assets Really Worth it?
Digital assets are highly volatile but can make you rich overnight also. Many have earned millions by investing in digital assets. There are also chances of fraud and losses associated with digital assets. This asset class is very risky and therefore one should invest in digital assets after having proper knowledge of it. It’s wise to invest in digital assets, only that amount which you can afford to lose. As of now the future of digital assets is very uncertain but one can consider investing a small percentage of their portfolio in digital assets.
Key Takeaway
(1) Digital asset is anything that exists in digital form, which can be stored and transmitted through digital means and is associated with the right to use or ownership.
(2) Some examples of digital assets are crypto currencies and non- fungible tokens (NFTs).
(3) Crypto currencies may be purchased or sold using cryptocurrency exchanges through the digital wallets.
(4) Bitcoin trusts, bitcoin mutual funds and blockchain ETFs are some other ways to invest in digital assets.
(5) A cryptocurrency is a form of token or coin that exists digitally or virtually and uses cryptography to secure transactions. Some of the most famous cryptocurrencies are Bitcoin, Ethereum, Cardano, Solana, Tether, Binance, Litecoin, Ripple, etc.
(6) Non- fungible tokens commonly called ETFs are artworks or some other content available in digital form.
(7) The advantages of digital assets are accessibility & liquidity, security, no interference of regulatory authorities and high returns.
(8) The disadvantages of digital assets are no government backing, chances or fraud & losses, irreversibility and limited use.
Also read: How Price Earnings Ratio (P/E ratio) Helps in Investment Decisions?
