A New Asset Class & The Digital Revolution
“In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”
—Eric Hoffer
This article was written by Isonex Capital as a guide for the emerging role digital currencies play within the global economy and asks if we are witnessing the birth of a new asset class. In just one decade cryptocurrencies have evolved from an obscure counter-cultural curiosity to a futurist monetary system to take us into the digital age. In the same time frame we have seen the mobile phone transcend from a telecommunication device to a technological extension of ourselves. We use it for just about every interaction, from web browsing and social networking to banking and retail purchasing. These two technologies mesh so well, they could have been developed with the other in mind, enabling us to conduct daily business on the fly. With many countries embracing a cashless model and cryptocurrencies gaining traction within the business environment, this symbiotic relationship between mobile devices and digital currencies expands integration through ease of use. China, although currently not crypto-friendly, has led the way in mobile payments, with most citizens transacting via the mobile app WePay. Japan, a leader in this space and very pro-crypto, has followed suit, with the successful launch of the mobile payments app Rakuten. Many other countries are onboard with these technologies that will no doubt be rolled out globally. The likely outcome is that the world’s largest economies will lead acceptance amongst their smaller counterparts. It is in this transitional economic environment that we pose the question as to whether or not cryptocurrencies are a new asset class.
Since the 2017 cryptocurrency bull run, which hit an all-time market cap of over eight hundred billion, both investors and the media have been so focussed on the price of digital assets that the real value tends to get overshadowed. Looking past the hype and price fluctuations, the technological innovation that some companies behind the digital assets are developing is where the real value lies. Fintech companies are one such example, where industry changing technology, if not hindered by regulatory heavy handedness, has the potential to revolutionize our entire global financial system through the eventual tokenization of all the world’s assets. This potential has not gone unnoticed by the IMF, which in recent talks expressed the need to implement digital currencies as the path towards future global prosperity.
In the modern digitalized world, money is increasingly becoming data, but under the current centralized fiat monetary system, money doesn’t move like data. We live in a time of instant messaging and yet it still takes days to send money from A to B, every transaction must pass through various clearing stages, incurring costs and delays for both the manufacturer and the consumer. This is no longer tenable, but change is on the way. Digital currencies offer real advantages over their traditional counterparts, the ability to instantly settle transactions at almost zero cost dictates that legislators will pass laws and regulations that enable a global financial reset. The world is switching to a cashless decentralized financial system, and that system is digital currencies, commonly known as cryptocurrencies.
We have been moving in this direction for some time, with many of us not even giving much thought to the payment methods behind online retail. But when we stop and think about it, money has been digitalized for longer than we realize. All the markers are there that we will eventually complete this transition into a fully digitalized financial system, but until it is fully realized, a question hangs over the cryptocurrency space. Are cryptocurrencies a brand new asset class? In order to evaluate this question, let’s first take a look at what an asset class is.
An asset class is a class of investments that have common financial characteristics and behave similarly in the marketplace. These instruments are often divided between tangible assets and intangible assets. Tangible assets by definition are value-generating physical assets that a business owns. This includes land, buildings, inventory, precious metals, commodities, real estate, land and machinery. Tangible assets are important for your business because they hold intrinsic value.
Intangible assets on the other hand are assets that can be converted into cash. Stocks, bonds, cash reserves, bank deposits, trade receivables, notes receivable and shares are all common examples of intangible assets. These intangible or liquid assets represent claims on the underlying value of the other types of assets such as real estate, properties or business operations. The main characteristic of intangible assets is that they have some type of monetary value, but that value is not tangible until it is exchanged for cash. Intangible assets also have classifications such as equities and fixed-income securities.
In the investment world, there are currently six main asset classes that have control over the global financial markets. These six being commodities, fixed income, equities, foreign exchange, infrastructure and real estate. They are intrinsically linked to one another and to the world’s central banks. Our national economies, job markets and even pensions funds are reliant on the position of these assets within the financial markets. But there are restrictions that hold these financial markets back, traditional stock exchanges trade for approximately 35 hours per week as they operate within different time zones. This means that on any given day global trading can only occur within a relatively small window. Digital assets have no such trading hour restrictions, this allows them to move quickly and at almost zero cost. One week in traditional stock markets is like a day in the digital asset market. Much of this is down to the ease of access for investors and 24/7 global trading.
Digital assets are being embraced and integrated into traditional markets. A good example of this is the DX.Exchange, a NASDAQ powered EU regulated digital asset exchange based in Estonia, a country that is at the forefront in cryptocurrency regulations. The platform enables traditional and digital asset investors to invest in blue chip stocks such as Apple, Amazon, IBM and Microsoft, by utilizing tokens backed by equities on a 1:1 basis via smart contracts. This enables investors to trade real stocks 24/7 in a secure and compliant trading environment on some of the world’s biggest stock exchanges, such as New York, Hong Kong and Japan without having to wait for traditional markets to open. This, in turn will inject more liquidity in the market which will further fuel interest in Digital Assets.
DX.Exchange is just one of many such start-ups. Abra, a cryptocurrency investment app, is expanding into stocks alongside a plethora of traditional assets. The company’s CEO, Bill Barhydt, a former CIA cryptographer, believes it could multiply over one hundred times the market for crypto alone. Investors in over 155 countries can sign up to get early access to the new service, which will offer dozens of traditional assets, from blue-chip technology stocks to exchange-traded funds. Add those to the 30 different digital assets and 50 national currencies the app already supports, and Abra starts to look like a one-stop shop for anyone serious about wealth creation. The potential is huge. Digital assets can offer exposure to bonds, equities, property, commodities i.e. almost any asset class and can be traded more efficiently.
The cryptocurrency industry has witnessed many announcements this past year, from CBOEs (Chicago Board Options Exchange) decision to trade bitcoin futures, to the announcement that MUFG, Japan’s biggest bank, is creating its own digital asset, this past week JP Morgan Chase, a global banking giant has announced plans to release a stable coin backed by the US dollar, signs that the crypto industry is evolving into something more mainstream, these are the first of many. Interestingly, a recent report from crypto fund research states that 1 out of every 5 hedge funds launched this year are specific to cryptocurrencies. The wheels of progress are in motion.
Due to a lack of regulatory clarity, many of the biggest players in the investment world have put their own crypto exchange launches on temporary hold. The likes of NASDAQ, Fidelity, TD Ameritrade and ICE the parent company behind the New York Stock Exchange who will be launching BAKKT are entering the cryptocurrency sphere. They will not enter a wild west, which is how crypto has been defined these last few years. They instead, require a market that has internationally recognized regulations along with secure custodial custody. There is a lot of talk that we are in the longest bear market since the inception of crypto, but this is misleading. The market is undergoing a transformation from speculation and hype to real- world utility that will see global adoption and financial stability in those digital assets that hold real value through technology and innovation. Most existing cryptocurrencies will not survive and new ones will be created in place of traditional stocks.
I think it is clear that we are witnessing the inception of a seventh asset class. Global leaders at the recent G20 Summit, held in Buenos Aires, drew up a first draft framework for crypto regulation. The summit was also attended by many of the world’s largest, most influential organizations such as the World Trade Organization, the World Health Organization as well as many leading banks. One of the topics on the agenda was the subject of cryptocurrencies. Eager to battle both money laundering and fraud in the financial market, leaders explained that they are looking to imprint stronger regulatory tactics on both cryptocurrency and blockchain businesses. Regulation is long overdue in this emerging market, and it would be true to say that regulatory clarity could kickstart an economical boost that the global economy so vitally needs at this time.
Global financial disparity is growing at an alarming rate, with a handful of centralized institutions controlling the majority of global capital and natural resources. Hard earned savings can be frozen or seized by governments and banks at any time, for any reason, often without much hope of recovery. Digital assets and blockchain, the transformative technology behind them, could enable people such as the unbanked, that have until now been marginalized, to participate and prosper through a real free enterprise. The implications for other innovations such as decentralization, trustless and voluntary governance are huge. Digital assets offer a chance to rewrite the social economic blueprint that determines our everyday lives.
Blockchain, the technology that underpins cryptocurrency, will revolutionize the world economy. Integration has already begun, internationally, banks and businesses are creating their own blockchains and digital assets, from stable coins to e-currencies and the tokenization of businesses known as asset backed tokens. The comparisons between blockchain and cryptocurrencies to the early days of the internet are obvious, particularly when viewed from an innovation perspective. Just like the early days of the internet, these new technologies will bring about enormous transformation both socially and economically. The difference this time is that the internet infrastructure for this new technology to operate on already exists. In an increasingly tokenized world, digital assets could become the biggest asset class of them all, perhaps one day holding the majority of global value, as all asset classes will be valued in digital assets.
**Isonex Capital is dedicated to the growth of digital currencies within the global marketplace and in facilitating investment into the blockchain ecosystem. We strongly believe in investor protection through security and transparency. We are committed to helping newcomers gain an understanding of the risks involved in this new asset class. If you would like to find out more about us, visithttps://isonex.io
