Is it Still Good to Invest in Digital Assets?
TLDR: Depends on your time horizon and which projects/currencies you are investing in. My personal belief is that 5 to 10 years from now digital assets will become a larger part of our daily lives and used in ways we are just beginning to uncover. As with all investments in risky assets, never invest more than you are comfortable losing and perform due diligence in any asset you put money into. Don’t simply pick an investment based on it’s ‘price’, that is only one, unimportant, metric as it doesn’t actually show if one asset is cheaper than another. This holds true for traditional assets (stocks/bonds etc.) as well as digital assets.
In order to determine if they are appropriate to invest in, we have to define what we are investing in and what your time frame for the investment is.
‘Digital Assets’ is typically used as a term that encompasses many different asset classes and as such should be broken down as follows:
- Cryptocurrency
- Utility Tokens
- Security Tokens
Cryptocurrency is the original class of digital assets and was created with Bitcoin (BTC), please read the Bitcoin white paper if you haven’t already, and was followed up by a number of hard forks (changes to the BTC source code resulting in a new coin) and technologies to compete with BTC as a currency. Examples of cryptocurrencies would be BTC/LTC/BCH/ETH/XRP and the reason to invest in one over the other would be the promise of the platform, future adoption and current use cases.
Utility token, Merriam-Webster definition:
“A digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency”
In simplistic terms, these are tokens that service a use case within a product or ecosystem of products to facilitate friction-less operation. Think of an arcade, you put in a dollar and the machine gives back 4 arcade coins that are used within the arcade to play games, but outside of the arcade are essentially worthless. The utility tokens go one step further and are issuing the ‘arcade coins’ before the arcade is built or the games are plugged in. What you are investing in here is the future prospect of using an amazing arcade and playing excellent games. Typically, these tokens are issued, or trade, at a discount to their redemption value as an incentive to support the project.
When investing in utility tokens, we must look at the quality of the project, the team that is driving development and how enticing the final ‘arcade’ will be. We see many examples outside of the blockchain and Dapp world where utility tokens thrive: arcades, rewards points, airline miles, etc. to show that there is a proven history where these assets can achieve and retain value. Once the projects begin releasing products and services we will have clearer insight into the true value and adoption of the coins and platforms under development. Until then, investing in utility tokens requires loads of due diligence as you’re effectively investing in pre-revenue early stage ventures. Once the projects and utility is realized, the metrics change and move to adoption and utilization. It’s important to head into these coins knowing their fundamentals can and will change during the course of the company/platforms life cycle.
Security tokens are effectively digital representation of rights to a company or stream of income. These are analogous to traditional financial instruments. For instance, stock represents three rights; voting, income and ownership rights. With security tokens, we can create three different tokens valuing each right individually. When making investments in these tokens, it depends on what you value. We see multiple real estate projects and early stage projects utilize security tokens in their offering (STO) to allow fractional ownership of assets (real estate, corporate equity etc.). The majority of these new STOs are augments of the initial coin offering (ICO) that was popular in 2017.
When looking at STOs for investment it is important to look again at the project or assets being purchased and what rights are ascribed to your token. I have seen some STOs that were simply ICOs that had Reg D filing associated with them. this produces an STO that actually provides zero rights. While this isn’t a pervasive problem, it is important to be very much aware of what you are purchasing and make sure it lines up with your expectations and their publicly available materials.
As with all investments, it is crucial to perform due diligence. Just like the stock market, it is tough to say ‘YES’ all stocks are still quality investments or ‘NO’ stay away. There are many factors at play in traditional and digital markets with the former having increased transparency and history to analyze compared to the latter. For these reasons, it is best to invest a small portion of your portfolio in digital assets versus a 100% allocation. Again, this assumes that you are OK with the known volatility and risk associated with investing in this asset class.
It is also important to utilize the correct platform for your investments. This is why we are creating 1Konto. We are bridging digital assets with the traditional markets. To learn more about how we are doing this, check us out at www.1konto.com or join our newsletter .
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About 1Konto
1Konto (German for “one account”) is in process of becoming the first to connect traditional and digital assets through one-click trading. We focus on increasing adoption of digital assets, reducing friction in ownership and bridging the new crypto world and the traditional financial markets all at the best price via our proprietary algorithm.
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