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Digital assets explained: intro to the new asset class, different types, trends and are they an investment opportunity?

written by Bella Palmer
digital-assets

The digital transformation of our world is well underway. It hasn’t happened overnight but it has also been rapid in the context of the scale of the change it has brought about. The successive impact of digital developments like the personal computer becoming a standard piece of technology in homes and workplaces, the internet, mobile devices, cloud computing and connected IoT devices has genuinely changed the world.

It’s now hard to imagine a pre-digital transformation world. But the digital transformation is actually only 30-40 years old if we start counting from the point the personal computer started finding its way into universities, schools, offices and the occasional home from the late 1980s to early 90s.

Over the handful of decades since human life in the developed world has become so interwoven with digital technology that many of us become uncomfortable if our smartphone is not within reach.

Our jobs (to a greater and lesser extent almost any worker in 2021 interacts with at least one digital tool and often many), financial transactions, consumption of media and general information, entertainment and leisure, travel and almost any other activity we care to think of, are either completely reliant on digital tools and technology or in some way touched by them.

Even something like gardening, which we might think of as rooted in the natural and physical world, has been transformed by the digital transformation. Hobby gardeners may well learn and get tips from YouTube videos and other online resources. Many will buy tools, machinery, equipment and other supplies online. Check the weather forecast on their smartphones and so on.

Into the early 2020s and, if anything, the digital transformation is accelerating. The pace of that acceleration may have been boosted by the recent Covid-19 pandemic but it was happening anyway, fuelled by constant technological development. Digitalisation is running ever deeper and will continue to do so for the foreseeable future.

Digital assets as an inevitable evolution of digital transformation

It could be argued that assets have been digitalised for some time. Financial institutions and traders have been trading financial derivatives like CFDs, futures and options for years. Financial derivatives don’t exist in any physical sense and only reflect the market price movements of ‘tangible’ assets like currencies, commodities, equities and debt.

But they are underpinned by tangible assets and financial instruments existed before the digital age, recorded and communicated by analogue means. Digitalisation has simply made them more efficient.

Of course, in 2021, a majority of the currency in the world exists only digitally as current and savings account balances that are never converted into cash but transferred from account to account electronically. But that’s also not what we mean by a ‘digital asset’.

What are digital assets?

The dictionary definition of a digital asset is:

Anything that exists in binary data which is self-contained, uniquely identifiable, and has a value or ability to use.” 

Over the past few years it has become an umbrella term to cover the diverse range of distributed ledger or blockchain technology and applications. Banking Hub defines digital assets as:

“….digital representations of values that are not issued or guaranteed by a central bank or public authority and do not have the legal status of currency or money. They are accepted by natural or legal persons as a means of exchange or payment or are used for investment purposes and can be transferred, stored and traded electronically.”

Most digital assets belong to one of four main categories:

  • Cryptocurrencies
  • Non-fungible tokens (NFTs)
  • Platforms
  • Decentralised Applications (Dapps)

 Cryptocurrencies

Cryptocurrencies are digital currencies that run on blockchain technology. The distributed ledger technology verifies transactions and maintains records of ownership. Security and accuracy of records is automated through the use of cryptography instead of a centralised authority.

Non-fungible tokens (NFTs)

Digital files whose unique identity and ownership are verified on a blockchain. Examples of NFTs include digital art, audio, video and photo files but any digital file only one copy of exists can theoretically be an NFT. Twitter founder Jack Dorsey’s very first tweet, also the first to be sent on the microblogging platform was recently converted into an NFT and sold for $2.9 million.

Platforms

Blockchain platforms are a collection of distributed ledger-based software, and the infrastructure they run on, designed to offer a collection of services. The smart contracts platform Ethereum would be the most well-known example of a blockchain platform.

Decentralised applications (Dapps)

Decentralised applications are simply software applications built to perform useful or enjoyable tasks but built natively on blockchain technology. A Dapp could be anything from a game to a workplace productivity or record-keeping tool.

The digital assets market

The total market for digital assets in Europe is expected to almost triple from €564 billion this year (2021) to €1478 billion by 2024.

Digital Assets in Europe

Source: Banking Hub

Still in its early stages as a market, it is difficult to predict just how big the digital assets class will grow in future years but even conservative estimates would indicate a CAGR of over 20% over the next several years. Potentially much more.

Investing in digital assets

Digital assets can be invested in directly by buying cryptocurrencies and increasingly NFTs over specialist exchanges. Digital artwork NFTs have also now been sold by the auction houses Sotheby’s and Christie’s.

As an immature asset class, digital assets are a risky and highly volatile investment and not suited to all kinds of investor. They should be considered a speculative investment at this stage.

As well as investing directly in digital assets like cryptocurrencies and NFTs, it is also possible to invest via a fund that will diversify exposure to the market. Funds may invest in digital assets themselves or companies exposed to the sector. There is even now a digital assets index and tracker fund that claims to provides approximately 75% coverage of total digital asset market capitalization, though it is only currently available to institutional investors.

Other investment options for sophisticated and high net worth investors include angel investment in start-ups exposed to the digital assets market. 

Important:

This article is for information purposes only.

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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