What are digital assets?
“Digital currencies, also known as cryptocurrencies, are a type of digital asset that uses encryption to protect against counterfeiting and duplicate spending.
Some examples of cryptocurrencies include Bitcoin, Ethereum, and Solana. Unlike traditional currencies, cryptocurrencies are not controlled by governments or third-party intermediaries, making them secure and resistant to manipulation.
Cryptocurrencies can be obtained through mining or purchased on exchanges. Although some online stores accept Bitcoin as payment, the use of cryptocurrencies in retail transactions is still limited.
However, the rapid increase in the value of cryptocurrencies has made them popular as a trade commodity and their growing value has made them a popular investment option and a commodity for cross-border transactions.
They allow for safe and secure internet transactions that exist outside the control of third-party intermediaries.
The underlying technology of many cryptocurrencies is blockchain, which is a decentralized network of connected blocks or a ledger that is maintained by a large network of computers.
The term “digital assets” encompasses anything created and traded on the blockchain, including cryptocurrencies, stablecoins, non-fungible tokens (NFTs), central bank digital currencies (CBDCs), and security tokens.
Digital assets are here to stay because they have evolved past the emerging stage. Just like cryptocurrencies, NFTs, security and utility tokens, and CBDCs, they are assets created and traded on the blockchain and can be divided into five categories: crypto assets, stablecoins, NFTs, CBDCs, and security tokens.
Crypto Assets: any digital asset stored on the blockchain that can be used as a store of value or a means of exchange (currency). These assets can be used for online payments, investments and creating a coin to fund projects, etc
Stablecoins: a kind of cryptocurrency with a fixed price. Prices for stablecoins are correlated with fiat money (like the euro or dollar), physical goods, or other digital assets.
Purposes it can serve: Foreign exchange, Payments Transfers and payments across international borders
NFTs: a token signifying possession of a certain digital item (eg: a work of art, a government ID, etc ). An NFT verifies that the holder is authorized to sell, trade, or redeem the underlying digital asset.
Purposes it can serve: Authenticating you and allowing access (to either a virtual or physical space), Using tokens in your supply chain to monitor inventory ownership and movement, Possession of virtual goods (games, avatars, virtual land)
CBDCs: this type of digital asset is a country’s fiat currency backed by a country’s central bank represented through digital assets. Not all countries issue CBDCs.
Purposes it can serve: Payments, Transfers and payments across international borders
Security Tokens: The definition of a security or financial investment, such as stocks and bonds, applies to digital assets.
Purposes it can serve: Stocks (equity) and bonds in tokenized form, representations of real-world goods in token form (real estate, property, plant, equipment, etc.)
Digital Wallets – Digital assets storage. Digital assets are stored on the blockchain ledger and documented there. Access to the assets is granted through private keys, which are stored in an encrypted digital wallet.
The blockchain ledger where digital assets were issued is where they are kept and documented (in most cases). New digital tokens are then issued with a private key that certifies ownership of assets.
You can conceive of your ledger entry’s public and private keys as being created by a computer, just like an email address and password. Wallets provide you with a convenient location to view your assets and ledger positions in addition to helping you securely store your keys so that only you can access your digital assets.
This is a crucial distinction: while the digital asset is kept on the blockchain ledger, the access keys are kept in an encrypted digital wallet.
There are two types of digital wallets; hot/warm(can be easily accessed and hacked because they’re connected to the internet eg: mobile devices) and cold (wallets not connected to the internet and are thus only harder to access and subject to physical and not digital theft eg: hardware)
If/when you want to do something with the digital asset, you will need to prove your ownership of it using your private key (like a password).
For instance, if you wanted to give send cryptocurrency to someone else, the transaction would need to be signed using your private key for it to be added to the blockchain as a new entry. For this reason, it’s crucial to keep your keys secure.
With bitcoin, anyone may become their own bank. An individual runs the risk of the traditional bank going out of business or mismanaging their money if they keep their assets there or at another financial institution. Counterparty risk is the name given to this kind of risk.
Digital assets and cryptocurrencies can remove counterparty risk because they are primarily decentralized.
Investors can completely own their digital assets and bitcoin by storing their own private keys in a crypto or digital wallet. No other asset has this property besides gold or silver.
By far the strongest performing asset class over the past ten years has been bitcoin. The gains from holding Bitcoin surpassed those of any other asset in the world for eight of those years. (However, like with any investment, past success does not guarantee future results.)
No other asset class can compare to cryptocurrency for its ability to diversify an investment portfolio. Since cryptocurrency tends to have little to no correlation with other conventional securities, it is referred to as a “non-correlated asset” (although there is no guarantee of future performance since it has changed at times).
All investing involves risk, but investors frequently overlook the one danger that comes with all investments made in fiat currency (stocks, bonds, mutual funds, ETFs, etc.): risk of inflation.
According to the law of supply and demand, if there isn’t a corresponding rise in demand that is at least as great as the increase in supply, a product’s price will fall.
In recent years, central banks have produced tens of billions of additional currency units, which has led some investors to turn their attention to digital assets and cryptocurrencies with fixed supply caps, like Bitcoin.
It should be highlighted that only cryptocurrencies with a fixed supply may effectively act as inflation hedges. Similar to gold, rare commodities typically appreciate in value during inflationary periods.
Whether you’re referring to the ups and downs of cryptocurrencies or the value of NFTs, digital assets may be very erratic.
Additionally, even if decentralized technology and peer-to-peer verification mechanisms are used to create, store and secure digital assets, those assets are still vulnerable to theft when blockchain networks are hacked. Additionally, a lot of fraud revolves around bogus digital assets.
Digital asset markets are mainly uncontrolled. In order to prevent losses, investors must proceed cautiously, checking processes and networks.
Overall, digital assets are a growing and evolving asset class with a range of potential uses, from authenticating access and monitoring supply chains to representing stocks and bonds, and more.
With the advancement of blockchain technology and its increasing acceptance, it is likely that digital assets will continue to play a significant role in finance and commerce in the future.