The crypto asset market currently stands at $211 billion, yet while this is a fraction of other mainstream asset classes, there is no denying that cryptocurrencies are set to play a much larger role in the financial services sector.
This is partly due to the massive growth in investor interest, but it is also because new developments in tokenization are offering crypto traders the chance to diversify their holdings and invest in tangible assets.
Many investors started their crypto journey by buying Bitcoin or Ethereum and then diversified into the lower priced and more volatile altcoins. As the market has developed, so has the desire for a wider range of products that leverage Blockchain technologies. Now, new and more sophisticated products are entering the market, such as tokens that are tied to assets.
Since as early as 2014, there has been a proliferation of Initial Coin Offerings (these ICOs are also described as token launches or token generation). In 2018 we have seen an increasing number of Security Token Offerings, or STOs, which represent the next generation of token offerings. STOs give crypto investors access to real world assets that have been tokenized, with each token representing a digital asset that operates like a traditional share or stock in compliance with securities regulations.
Last year, 2017, was considered a landmark year for ICOs, and although launches have slowed down this year, partly as a result of regulatory uncertainty, the use of Securities Token Offerings is set to expand from trading-based cryptocurrency holdings to a wider range of investments that incorporate real, fungible assets.
The appeal of tokens with intrinsic value
But it is asset-backed tokens that are tied to real estate, in particular, that are gaining the most adoption. This is because they offer the holder of the token the potential stability that results from the token being backed by physical real estate assets. Securities tokens can be a digital representation of a wide range of real-world assets, creating a tradeable token with measurable intrinsic value. This leverages the efficiencies of the Blockchain and potentially reduces the volatility and unpredictability suffered by other non-asset backed tokens. Securities tokens give crypto investors the ability to make a passive investment in previously untapped and illiquid assets.
Diversifying the crypto allocation
Tokens tied to assets can provide an excellent route for crypto investors to gain the advantages that cryptocurrencies provide while at the same time benefiting from the potential stability and predictability of the underlying assets. Asset-backed tokens open up a multitude of new possibilities for crypto participants who are seeking risk-adjusted diversification in their crypto portfolio and a hedge against the some of the current market risks.
In addition, securities tokens and asset-backed tokens are issued in compliance with securities regulations and subject to the oversight of the country’s financial regulator, which provides a level of confidence and protection for the crypto investor.
Providing investors with the opportunities to diversify their crypto allocation into asset-backed options is an exciting development. It is possible that in 2019 there will be a tsunami of asset-backed options available to investors as the substantial benefits that the Blockchain brings in terms of lower costs and increased efficiencies becomes more widely understood.
And while asset-backed crypto companies are still the new kids on the blockchain, for those wishing to move a portion of their crypto holdings to more secure and non-correlated assets, they would do well to take a closer look.