While digital asset markets offer opportunities for wealth generation and investment returns, there are structural risks and volatility that makes it important to take the time to know these new markets. The article explores both sides.
To value digital assets, first, you have to truly grasp what value there is that doesn’t come from the business context of those assets. For example, your auto repair blog is not generating money today, but it might be invaluable to someone someday.
Cryptocurrency
The cryptocurrency markets are a wild and volatile place. New coins are issued almost daily, while old coins die and are discarded. Speculators try to earn an honest living trading back and forth. It can be hard to figure out which projects are worth putting money in, which have real-world applications and uses other than just a game, and which are mere vessels for speculation.
Cryptocurrencies can play a crucial role in extending the economic freedom of people across the globe Today, cryptocurrency-based payment systems enable you to shop online without having to go through intermediaries and without depositing your money in the banking system, and using prepaid balances denominated in government-issued currencies. Furthermore, cryptocurrencies can serve as alternative savings-and-payments media to dysfunctional fiat money.
Howey test: if it is used as a store of value, and can be exchanged back for something of equivalent value. Also, if it is available in transactional amounts (as is the case for Bitcoins) and it is marketed to appeal to people who are buying it to use, rather than buy and hold, or to flip it at a profit.
Non-fungible tokens (NFTs)
A non-fungible token (NFT) is a digital marker of an asset stored on a blockchain (a ledger that records transactions in a way that prevents tampering) and owned by a digital ‘wallet’ that holds this right. Each token is assigned unique coding, which makes it infeasible to copy, exchange or replace with another and, as demand increases, it becomes even more valuable.
NFTs can be minted to represent whatever you can imagine – characters in a video game, digital collectibles, physical collectibles, domain names, domain name registrations (and anything else) … and they have the ability to demonstrate that the claim to unique authority and authenticity is meaningful in ways that change how industries can operate as they grant new powers to creators to track and share digital assets.
NFTs have increasingly been used by artists looking to bypass existing gatekeepers to sell directly to fans, as demonstrated by the $6 Million paid for NFTs of music videos by the Canadian musician Grimes, which she sold on the site Nifty Gateway. People can also support up-and-coming artists and creators through financial investment, by words of encouragement and praise, and royalties when the token is resold – another means of earning passive income from royalty payments each time the token is resold.
Initial coin offerings (ICOs)
In these ICOs, investors use existing cryptocurrencies or fiat money to buy new digital assets in the form of tokens. These tokens can be used to access a platform upon which a project is built or, alternatively, to make purchases of goods and services produced by the project. ICOs differ from IPOs and crowd sales in two important respects. First, rather than using underwriters, necessary to share the risk of fraud on the initial investment bank when selling a security to investors, ICOs sidestep underwriting costs and let the software conduct the sales. Second, and more important, ICOs expose most investors to the price volatility of cryptocurrencies during the buying process.
So there’s a kind of an ICO veil here – if you’re someone interested in ICOs, you should read the full offering documentation to figure out what rights to the company you are acquiring as an investor. Is the company merely selling you software or a videogame? Or maybe there’s no product at all. And be extra careful if you’re planning to buy long term: do so only after careful contemplation.
Since ICOs might raise large amounts of capital in a short amount of time, there exists a potential of fast and lucrative capital gain, which in turn attracts many potential investors to the ICO market. The pricing of ICOs means that they have a tendency to move either up or down drastically, especially if the cryptocurrency market demonstrates significant fluctuations. As for risk, there is a chance that investors who do not sell immediately might lose their capital in full.
Regulation
There are transformational possibilities in the digital asset markets for service providers in the financial services sector, whether in brokers and custodians that can provide value-added services such as digital token exchange and open blockchain networks where investors can purchase fractional ownership of permissioned assets as well as programmatic and transactional flows that are more efficient and settled faster and less expensively.
Furthermore, these services might enable investors, companies and other market participants to lower both capital and operational expenditures – thereby encouraging the market infrastructure to develop in a more sustainable fashion.
Through this executive order, federal agencies are directed to formulate an integrated regulatory framework for digital assets that balances maximising innovation while engaging in strong protections for consumers, investors and businesses, as well as directs regulators such as the SEC and CFTC to aggressively investigate and prosecute bad actors, while bolstering their attempts to monitor and protect consumers. This document also contains a framework for addressing risks related to the role and use of digital assets and their impacts on events such as domestic and international financial stability, markets and systems.
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