What are digital assets? How to invest in digital assets?

 

What are digital assets?
What are the types of digital assets?
What is the difference between ICO & IPO?
How to invest in digital assets?
What are the risks involved with digital assets?

1. What are digital assets?

Since there is a belief that investing in digital assets could generate high returns, the trend of investing in these assets has grown significantly during the past 1-2 years.

 

People believe that digital assets are digital currencies. Although digital assets include digital currencies, its definition is not limited to these currencies only. Its definition is broad enough to include other digital products and services.

 

The other names of digital currencies include digital tokens, digital coins, and crypto tokens.

Related article on digital asset management and the cheapest way to digital asset management

 

2. What are the types of digital assets?

There are two types of digital assets viz.

(a)            Cryptocurrency, and

(b)           Digital Tokens.

 

(a)            Cryptocurrency: It is an electronic data unit created to serve as a medium for exchanging any commodity against that unit. If users accept, cryptocurrencies can be used to exchange goods, services, and other digital assets.

The cryptocurrencies are not legal tender and any central bank would not guarantee that they can be used to pay debts according to the current law.

Examples of cryptocurrencies are Bitcoin and Ethereum.

 

(b)           Digital Tokens: Digital tokens are electronic data units that are created to determine

-Investment/Asset/Security token

-Utility tokens: The right to acquire products or services, or other rights

-Payment Tokens

 

As agreed, the token issuer may offer tokens through the initial coin offering (ICO) process.

ICO is a type of fundraising that uses blockchain technology.

 

The company will offer and determine the sale of tokens that in turn determine the rights and interests of investors. Such rights and interests may be:

-Participation in profits

-Right to acquire specific products or services

 

3. What is the difference between ICO & IPO?

ICO is not a stock not a debt, but it is similar to IPO in many respects.

 

ICO investors are not owners of the company like IPO shareholders.

 

They may not be the creditors of the company, and may not have property rights in case of dissolution or bankruptcy.

 

ICO token holders will have the rights mentioned in the White Paper.

 

The white paper is a document released by the crypto project that gives technical information about the project, and a strategy for how it grows and succeeds.

4. How to invest in digital assets?

Step 1: Risk Assessment

Since investing in digital assets is a new arena, it involves high risk. You should perform a risk assessment and take into account your sources of funds before investing.

 

You should invest only such an amount whose loss will not impact you at all.

Otherwise, if you have the money that you can afford to lose, you can invest in digital assets.

But, if it is illegal in any jurisdiction, then my recommendation is not to take the risk.

 

Step 2: Approval Verification

If you are ready, you should invest in digital assets after performing an appropriate market study. You should deal with the Digital Asset Exchange, the Digital Asset Broker, and the Digital Asset Dealer, which have been approved by the Securities Exchange Commission (SEC).

 

By doing so, you can reduce:

-The risk of being tricked, or

-The risk of being scammed

 

But when you invest in digital assets not authorized by SEC, if it is damaged, you will not receive any protection in any case.

 

Step 3: Check Standards

How to find whether the company has standards or not

The following things are to be considered

-See whether there are adequate funding sources

-See whether there is enough security

-See whether the risk management of theft can be verified

-See whether there are anti-money laundering measures

Step 4: Making Investment

Now you can visit the company's website and study the information and details.

 

Then register according to the steps provided therein.

 

Suppose you are familiar with investing in stocks. In that case, you find similar information such as digital currency list, the latest trading price, trading amount, highest or lowest price, and other information such as fees, analysis, etc.

 

Otherwise, you can invest in digital assets through cryptocurrency exchanges, trading applications, selected banks, and or brokers.

5. What are the risks involved with digital assets

Though investing in digital assets sounds very promising, it is not free from risks. The higher the returns you can get from investing in digital assets, the higher the risk you have to encounter. The followings are the inclusive list of risks involved with digital assets.

1. Volatility Risk
2. Valuation Risk

3. Liquidity Risk
4. Technology Risk
 5. Hard Fork Risk

6. Fraud, Theft, and Cyber Attack Risk
7. Legal, Tax, and Regulatory Risk
8. Supervision Risk
9. Operational Risk
10. Credit & Counterparty Risk
11. Other Risk

 1. Volatility Risk: The volatility risk is associated with the changes in the value of digital assets. The value of digital assets is highly volatile. 

You may experience extreme bullish and extreme bearish trends in the value. There are chances that your whole investment may turn worthless. 

In addition, changes and advances in technology, fraud, theft, and regulatory changes may further magnify the volatility. 

2. Valuation Risk: The amount, at which the digital assets should be measured, is one of the most challenging tasks. In many cases, there may not be any proven valuation techniques or methods. 

The value of digital assets depends upon the expectation and trust that digital assets can be used for future payment transactions. They do not have their own physical existence. 

-Investment/Asset/Security Tokens: For the asset tokens listed in the stock market, you can use discounted cash flow analysis plus liquidity or illiquidity premium depending on the maturity of the company and trading conditions.

 

For the assets token not listed in the stock market, it would become cumbersome to determine the liquidity or illiquidity premiums.

-Utility Tokens: It refers to the right to acquire products or services, or other rights in the future.

Regarding valuation,

-There is no proven valuation method.

-Some utility tokens are issued without intrinsic value

-There is no guarantee that the products or services will successfully be developed.

-Payment Tokens: It is hard to assign objective value to the payment tokens as the value of payment tokens depends upon demand and supply dynamics on a global basis.

In addition, volatility, changes, and advances in technology, fraud, theft, and regulatory changes may turn the value of digital assets worthless.

3. Liquidity Risk: The market for digital assets may experience high illiquidity under certain conditions.

There is no guarantee that a private company will conduct ICO or provide you with an alternative exit strategy for your invested capital.

The market capitalization of Bit-coin represents more than 50% of the total market capitalization. For other digital assets to obtain significant positions, it may take time.

4. Technology Risk: The technological advancement in some digital assets may bring a security threat and may also render some digital assets obsolete or less relevant.

Developers may introduce weaknesses and programming errors into the open-source software. 

There may be threats of theft, fraud, and cyber-attacks.

5. Hard Fork Risk: There is no central body/government agency that oversees:

-The development of technology related to digital assets

-The functioning of digital assets

-The further improvements in digital assets

 

All these along with the following relies on the collaboration and consensus of various stakeholders and developers (miners) to enhance the open-source software related to digital assets.

-Ability to increase the number of transactions

-Reduce processing time

-Reduce transaction fees

-Implement security updates

 

In case of any disagreement among stakeholders, it may result in a split of the digital asset network into two or more incompatible versions. This event is called a hard fork.

 

Such events may render the value of digital assets worthless and or may make the value of the digital assets unstable.

6. Fraud, Theft, and Cyber Attack Risk: The peculiar characteristics of digital assets make them vulnerable to attack. This peculiar characteristic is that they only exist virtually on a computer network.

Denial of service attacks may render the digital asset network resources unavailable. This may result in a significant waiting period, network congestion, and delays in disposing of the digital assets. 

Market abuse, market manipulation, insider trading, lack of supervision, regulation, and market control may catalyze the risk of digital assets.

7. Legal, Tax, and Regulatory Risk: The changes in the laws and regulations may impose

-Additional compliance requirement

-Control mechanisms

-Transaction fees

This may impact the valuation of digital assets. In addition laws and regulations may render the trading of some digital assets illegal.

8. Supervision Risk: The digital assets are not supervised by any authority like the central bank. 

No authority may intervene in the digital asset market for the stabilization of the value of digital assets, and mitigate or eliminate the irrational price development of the digital assets.

9. Operational Risk: Once the transaction is executed, it is impossible to reverse the transaction or cancel thereof.

Once the digital asset is sent to the wrong distributed ledger address, it will result in the total loss of funds.

So the user always has to check that the digital asset is destined to a proper distributed ledger address before confirming.

10. Credit & Counterparty Risk: 

The bankruptcy of the issuer is high in the case of tokenized securities. This may leave the value of the digital assets unrealizable. 

11. Other Risk: 

Holding a digital asset is equivalent to having the private key that gives access to the digital asset.

 

When this key is lost, your digital asset is lost forever. There is no central body to regenerate that key again.

 

When this key is stolen, you are giving access to the malicious intruder.

 

Conclusion

You are recommended to invest in digital assets after considering the risk factor, your present income, and their legality in the relevant jurisdiction.

If you have the money that you can afford to lose or if the loss of digital assets will not impact you financially, you can invest in digital assets.

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