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Tokenization is transforming the investment landscape by making it possible for a wider range of individuals to invest in traditionally inaccessible assets. By converting these assets into digital tokens, investors can purchase fractional ownership and benefit from increased liquidity and reduced transaction costs.
This technology is democratizing investment by making it accessible to a wider range of individuals and providing them with more opportunities to diversify their portfolios. As tokenization continues to evolve, it has the potential to revolutionize the traditional financial industry and create new investment opportunities.
You may be wondering that this tokenized asset is and what is this all about? Here we describe how this process works, the benefits and of course, some topics to be considered.
Before I start, I had this article almost prepared for 1 year, but I did not have the time to finish it. Since I had to work on this topic in the past days, I have taken the chance to complete it now.
Synthetic assets are an innovative way of leveraging tokenization technology to create new investment opportunities. Essentially, they are tokenized derivatives that allow investors to profit from price fluctuations of various assets without owning them. By creating a blockchain record for the relationship between the underlying asset and the purchaser, synthetic assets provide a transparent and secure way of trading these derivatives.
In traditional financial markets, derivatives are used to speculate on the price movements of various assets without owning them. For example, an investor may purchase a call option on a stock, allowing them to profit if the stock’s price increases without owning the stock. Synthetic assets take this concept one step further by adding the record for the derivative on the blockchain and creating a cryptocurrency token for it.
This technology has significant implications for the DeFi movement, allowing investors to access a wider range of investment opportunities and trade these derivatives in a more transparent and secure way. With the growth of the cryptocurrency market and the increasing demand for DeFi applications, synthetic assets are likely to become even more popular in the future.
Overall, tokenization and synthetic assets are transforming the traditional investment landscape by democratizing access to previously inaccessible assets and creating new investment opportunities. As the technology continues to evolve, it will be interesting to see how it is further leveraged to reshape the financial industry and create new possibilities for investors.
Tokenization is revolutionizing the way corporations raise funds and issue equity securities. By converting these securities into digital tokens, corporations can streamline the fundraising process and potentially reduce costs associated with traditional methods of issuing securities. Asset tokens with equity rights are gaining popularity among corporations as they provide investors with access to fractional ownership of the underlying assets and can be traded in a more secure and transparent way.
Tokenization also offers other benefits for corporations, such as increased liquidity and the ability to reach a wider range of investors. By issuing tokens on a blockchain, corporations can potentially attract a global pool of investors and reduce the time and costs associated with traditional fundraising methods.
As tokenization continues to evolve, it is likely that we will see more corporations turning to this technology as a way of raising funds and issuing equity securities. However, it is important for investors to understand the potential risks associated with investing in these tokens, such as regulatory uncertainty and market volatility.
Overall, tokenization is transforming the traditional corporate finance landscape by providing more efficient and cost-effective ways of raising capital. With the potential to reduce costs and increase accessibility, it is likely that we will continue to see the use of asset tokens with equity rights and other types of tokenized securities grow in the coming years.
The process is like the one used in ICOs. Some of the similarities include the usage of blockchain technology and allowing investors to own a partial of the asset or the project/platform.
Income, such as dividends or interest payments, is a great component of assets and their performance. The idea in this case is that even the entity (exchange, asset manager, etc.) is the one owning the “real” asset, the payments that the broker will get are then distributed to the owners of the tokenized assets.
This may happen regularly in assets such as shares or ETFs, but you will find different cases where the same applies to other securities such as bonds.
Please note that in some cases the broker may charge some fees because of the forwarding/processing the different payments. This will depend on the terms and conditions of the entity.
For example, let’s imagine you own 100 tokenized Microsoft shares. The broker owns the real MSFT shares and will get 70 USD for those shares. You may get less than these 70 USD (e.g., 68 USD= because of the processing fee that different brokers may change. The fee will be also described in the prospectus.
Something similar may happen to bonds. In the case below you can see how the different payments are paid to the holders of the token-based bonds issued by Bitcoin Finance GMBH.
With the rise of bonds in 2023, like Eurobonds, and adding the component cryptocurrencies, investing in synthetic assets whose underlying are bonds may also help you with your investment in terms of:
Apart from equities and debt shown above, you can tokenize anything These are some of the asset classes you can also invest in easier the moment you have access to tokenized assets.
Some real examples of these tokenized assets are the ones below:
mIAU is a tokenized stock of the iShares Gold Trust ETF, which tracks the price of gold.
The Mirrored iShares Silver Trust (mSLV) is a tokenized stock of the iShares Silver Trust ETF, which tracks the price of silver.
Mirrored United States Oil Fund (mUSD) is a tokenized stock of the United States Oil Fund ETF, which tracks the price of West Texas Intermediate crude oil.
Mirrored Invesco QQQ Trust (mQQQ) is a tokenized stock of the Invesco QQQ Trust ETF, which tracks the Nasdaq 100 Index.
Vanguard Real Estate Tokenized Stock Defichain (DVNQ) is a tokenized stock of the Vanguard Real Estate ETF VNQ.
Having described these asset classes, we cannot forget about crypto itself. You probably have Heard about Wrapped Bitcoin or any other Wrapped crypto.
Wrapped crypto tokens are an innovative solution to the problem of interoperability between different blockchains. Essentially, a wrapped token is a tokenized representation of a particular cryptocurrency that is operable on another blockchain. This means that you can take a cryptocurrency asset from one blockchain and wrap it in a token that can be used on a different blockchain.
The value of a wrapped token is the same as the original cryptocurrency asset, but it can be used on a different blockchain. This is particularly useful in the context of decentralized finance (DeFi), where different blockchain networks may have different DeFi applications and ecosystems.
By wrapping a cryptocurrency asset in a token, it becomes easier to transfer value across blockchains that otherwise lack interoperability. This enables a cross-chain DeFi ecosystem where users can access a wider range of DeFi applications and services.
Overall, wrapped crypto tokens are an exciting development in the world of blockchain and DeFi. By enabling interoperability between different blockchains, they are helping to create a more connected and efficient decentralized financial system. As the DeFi ecosystem continues to evolve, it’s likely that we will see more innovative solutions like wrapped tokens emerge to help overcome the challenges of interoperability and drive the growth of this exciting new field.
When analyzing the performance of our asset, taxes also play an important role too. They will have a bigger impact than the fees we may have to pay.
Although in several countries, they will be treated as the underlying asset, depending on the country you live, there may be different ways on how they are taxed, and in consequence, the impact on your final return.
For example, a clear example would be Greece. in Greece capital gains on listed shares or UCITs funds will trigger a tax-exempt capital gain. On the other hand, if you invest in tokenized assets, these exemptions are lost, and you will have to add a penalty of 15% to your realized gain.
Tokenization brings several benefits and allows investors around the world, mainly with no resources to access financial markets, to invest almost in anything. However, as you can guess, this has also several risks.
While tokenization can increase the liquidity of an asset, it does not guarantee liquidity. Tokenized assets may be illiquid, especially if they are newly issued, have a limited market, or if there is a lack of demand.
Tokenized assets rely on smart contracts to execute trades automatically, without the need for intermediaries such as banks or brokers. However, smart contracts can have vulnerabilities, and if they fail or are exploited, it can result in significant financial losses for investors.
Tokenized assets may be subject to high volatility, just like any other financial asset. The price of a tokenized asset may be influenced by market conditions, supply and demand, or other external factors, and may fluctuate rapidly, resulting in significant gains or losses for investors.
Not related to synthetic assets, but just think about the Grayscale Bitcoin Trust shares. For months, this fund has been on the news because of the discounted price is trading, comparing it with the value of the bitcoin it owns.
Of course, when it comes to crypto and the lack of regulation beware of any fishy projects, because they may become scams sooner or later.
To sum up, tokenized assets are a powerful tool for investors seeking exposure to assets that may be difficult or impossible to access directly. By replicating the performance of underlying assets, these synthetic assets can provide investors with the ability to gain exposure to a wider range of assets, diversify their portfolio, and potentially benefit from market opportunities.
However, synthetic assets also carry their own unique risks. For example, counterparty risk refers to the risk that the party on the other side of the transaction may not fulfill their obligations. Market volatility can also impact the value of synthetic assets, as their value is based on the performance of underlying assets. Finally, liquidity risk refers to the risk that synthetic assets may not be readily tradeable, potentially limiting investors’ ability to exit their positions.
It’s important for investors to carefully consider the risks and potential benefits of these assets before investing. Investors should also be aware of the regulatory landscape surrounding synthetic assets, as regulations may vary depending on the jurisdiction.
Despite the risks, tokenized assets offer a powerful tool for investors seeking to gain exposure to a wider range of assets. As the financial industry continues to evolve, it’s likely that we will see continued growth and innovation around synthetic assets, providing investors with even more opportunities to diversify their portfolios and potentially benefit from market opportunities.
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