The sudden rise of NFTs has put the focus on a new type of cryptocurrency asset: tokenized assets.
But what are tokenized assets? And why should you consider them over real-world assets like Gold, real estate, and other traditional assets?
Tokenized assets are real-world assets that have been integrated with blockchain technology. Like popular cryptocurrencies, tokenized assets are just as tradeable. One can send The token that represents real-world assets worldwide or even theoretically split into fractional shares.
Yet, does tokenization necessarily make an asset more valuable or a better investment? That ultimately depends on the investor, but you need to properly educate yourself about tokenized assets before understanding which asset class is right for you.
Today, we’re going to dive into the world of tokenized assets compared to non-tokenized real-world assets. We’ll explore the difference between them with the focus on helping you decide how you’d like to invest.
How Are Assets Tokenized?
There are plenty of ways to tokenize a real-world asset from a technical perspective, but all of them depend on a legally-upheld bridge. This bridge must create an airtight connection between the physical asset and the token representing it.
You can theoretically tokenize Any physical asset; it depends on whether a company has a profit motive to take on the task. One can tokenize Gold, other precious metals, deeds, or vehicles.
It is necessary to have a solid legal structure that connects the asset to the token. There must also be a way for the token owner to physically take ownership of the real-world asset. Otherwise, there’s no legitimacy behind the token.
What Are the Benefits of Tokenization Over Real-World Assets?
Why go through all this effort? How is all of this creating a better investment opportunity? Why can’t I buy a bar of Gold and put it in my safe?
These are all great questions.
There are many reasons why a tokenized asset is a more attractive investment than a real-world asset. There are a plethora of reasons why a tokenized asset might be a better use of your money. Let’s explore them.
Straightforward Ownership Exchange: Real-World vs Tokenized Assets
All tokenized assets exist on the corresponding blockchain (which is generally Ethereum these days, but that is not always the case). A blockchain is an ongoing, immutable ledger of every transaction ever made, including those pertaining to tokenized assets.
This means that if you want to buy a tokenized bar of Gold, you can see everyone who has ever owned that bar of Gold through their cryptocurrency address — not their name and real information unless specifically included as a memo.
All of this means that, in comparison to their real-world assets, transferring ownership of tokenized assets is incredibly simple.
For example, if you want to buy a deed to a house outside of tokenization, there is a lot of bureaucracy to deal with, and a lot of it relies on validating all of the facts in the sale. Conversely, a tokenized asset already has its entire history on the blockchain, expediting the whole process.
What about simpler assets? Let’s consider an investor interested in buying a bar of Gold. Their options are to buy a real-world bar of Gold and take on the responsibility of storage and security, or buy a tokenized bar of Gold that they may never actually see unless they redeem the token.
The bar of Gold is going to sit in a safe and be worth more or less depending on market conditions. If the investor wants to sell it, they have to take it to a trusted source. They have the authenticity verified among other processes and receive less than the market value because the buyer needs their commission.
Conversely, the tokenized bar of Gold will remain in a secure location and can be traded with anyone on the planet. It does not need to be verified and graded because it never left the trusted source that tokenized the bar of Gold. Selling the token is nearly as easy as selling some Bitcoin.
Liquidity Provided By the Entire World: Real-World vs Tokenized Assets
Liquidity is an issue with nearly every real-world asset. These siloed investment opportunities often have a limited market and then become stagnant or slanted towards buyers or sellers. Even something like Gold can have a varied price from region to region. Meanwhile, liquidity dominates real estate, with markets going between a buyer’s market or seller’s market based on the number of available assets and buyers.
Tokenized assets open up the asset to a global marketplace. Anyone on the planet could theoretically bid on the tokenized asset and take ownership of the real-world asset it represents. In a perfect world, that would mean anyone could buy a new home anywhere in the world without worrying about it being a buyer’s or seller’s market.
Now, real estate will always require some level of regulation. But in theory, tokenization can eliminate a lot of the bottlenecks in the process, increasing transparency across the board.
Tokenization Creates Programmable Assets
Ethereum pioneered the concept of smart contracts. These smart contracts allow for a certain action to occur once a certain condition is met. For example, a Dead Man’s Switch can send the assets somewhere else after the original wallet was inactive for a preset amount of time. There are endless other ways that add even more utility to the tokenized asset.
There’s another added possibility thanks to programmability – DeFi using tokenized assets. DeFi (decentralized finance) took the crypto world by storm in recent years, and tokenized assets are already being integrated. There’s a lot of complexity behind DeFi, but in the case of the bar of Gold. The investor could theoretically be earning a high APY on the Gold while holding onto the token.
What About Taxes? Real-World vs Tokenized Assets
Taxes are a hot topic with anything cryptocurrency related, and tokenized assets are no different. Many countries and regions have established laws about taxing and addressing tokenized assets. Before investing in tokenized assets, every investor should familiarize themselves with the applicable tax laws.
Tokenized Assets Might be the Future of Investing
There’s a lot to like about the emerging class of tokenized assets. At the same time, it’s also an emerging market using experimental technology (blockchain).
We advise that you read up on blockchain and tokenization before you significantly invest in tokenized assets.
Are you looking to invest in tokenized assets? Sign up for a Coinmotion account today and instantly gain access to popular cryptocurrencies, tokenized assets, and more.
The following piece does not include any investment advice. It is worth noting that investing in any digital asset includes risks, which should be carefully assessed before making important decisions.