Cryptoassets as an Alternative Investment Class

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Money, as a means of payment with a certain value within the financial system, has come a long way through the centuries and today takes on a new appearance in the form of cryptocurrency assets. Being an excellent means of payment, as already confirmed by the practice of many institutional investors, many are still wondering how good digital assets are as an alternative way to invest.

What are Crypto Assets and What is Their Purpose?

Cryptocurrency is a modern analogue of the money we are accustomed to, which is created, used, and exists exclusively on the Internet. Electronic currency cannot be obtained in cash, but can be presented in the form of dollars, euros or pounds, converted into real currency at the current market rate. In essence, it is a digital code that is transferred from one computer to another. This digital code is obtained by exchanging information between users, which is collected in certain cells of the block, connected with each other. When the block is fully populated, a unit of electronic currency appears, which goes into the wallet of the user who confirmed access to the block.

Traditional finance vs cryptocurrency – which is better? Cryptocurrency is not controlled by states or central banks, which cannot be said of conventional money in the traditional banking systems. This advantage attracts many institutional investors because of its reliability. It makes transaction processing independent, transparent to all participants in the blockchain’s network of computers, yet anonymous. 

Today, there are no legislative and legal norms governing such financial transactions, but this is an advantage because, in simple terms, cryptocurrency replaces banks and traditional payment systems, taking financial transactions out of the control of states and corporations.

Since its inception, the crypto-asset market has shown incredible growth every year, attracting more and more ordinary traders and institutional investors. At its bullish peak in 2021, the market reached an all-time high of $3 trillion, demonstrating the overwhelming commitment and confidence in the new blockchain technology that has underpinned countless different applications of digital money, such as DeFi, NFT, GameFi, and Metaverse, which are now attractive investment targets for institutional investors.

Key Takeaways

  1. Cryptocurrency financial instruments, being the most popular investment instrument for institutional investors, are an independent financial instrument with no control from both government agencies and financial institutions, especially banks. 
  2. Over the history of the crypto assets market, the absolute and maximum value of its capitalization as of 2021 reached the figure of 3 billion U.S. dollars.

Types of Crypto Assets and Their Classification

The cryptocurrency market today offers an incredible number of different crypto assets, which are of interest to both institutional investors and ordinary traders. Some of them are already actively used in everyday life, some still have a great future ahead of them, but there are also some that will probably soon lose their usefulness.  

Each of the digital currencies represents a certain value expressed in U.S. dollars or any other fiat currency. The whole variety of coins circulating in the capital markets can be classified into several groups, because each of them has its own features and functions.

1. Cryptocurrencies

Crypto financial instruments are a modern analog of the money we are accustomed to, which is created, used, and exists exclusively on the Internet. Electronic currency cannot be obtained in cash, but can be presented in dollars or euros and converted into real currency at the current market rate. It is a digital code transmitted from one computer to another. This digital code is obtained by exchanging information between users, collected in certain blocks’ cells, and connected with each other. When the block is fully populated, a unit of digital currency appears, which goes into the user’s wallet, which confirms access to the block.

The most popular cryptocurrencies are Bitcoin, Ethereum, XRP, etc.

2. Stablecoins

Stablecoin is a fixed-rate cryptocurrency whose value is tied to a fiat currency or physical asset. Examples of such tokens are: Tether (USDT) pegged to the price of the dollar, Stasis Euro (EURS) pegged to the price of the euro, PAX Gold (PAXG) pegged to the price of gold. 

Stablecoins differ in the mechanism by which they are pegged to an asset. There are three main types: stablecoins with reserves in the form of traditional assets; stablecoins with reserves in the form of other cryptocurrencies; and algorithmic stablecoins. Stablecoins can also be divided into centralized and decentralized.

3. CBDC

CBDC (Central Bank Digital Currency) is a financial instrument, which is a cryptocurrency and blockchain technology with some limitations and is intended for implementation in the traditional financial system. This digital currency is an alternative version of paper and non-cash money. This type of crypto assets, among other things, serves as a measure of value, accumulation, and payment system.

4. Tokens

A token is a unit of accounting for assets in all IT projects, analogous to shares on a stock exchange. They are issued to raise funding for IT startups as part of the ICO procedure (token issue), credit, and monetization of additional services for IT project participants.

The tokens are accounted for using blockchain technology and are accessed using special software with a digital signature. This ensures maximum protection of ownership rights to the electronic asset. After all, each transaction contains data on all previous transactions with IT project tokens. The information is stored by all network participants rather than on one central server, so the database cannot be hacked.

Of all the crypto asset classes that exist on capital markets, cryptocurrency assets are the most popular among private and all types of institutional investors.

FAST FACT

Crypto Assets as an Alternative Investment Class: Benefits and Drawbacks

Now that you know what crypto assets are, what types they are divided into, it’s time to find out what advantages and disadvantages they have as investment opportunities for both institutional and private investors.

Benefits of Crypto Investing

 Let’s get started with benefits.

1. Yield

Digital assets in all their variety are an incredibly profitable investment tool, which allows you, with the right investment strategy, to get incredibly high interest in trade. As a rule, this is due to the high volatility of digital coins, which is a very common phenomenon in the crypto markets. This allows many institutional investors to get good returns using different trading styles, as well as private investors who, with smaller amounts of cash, do not miss an opportunity to take a bite out of the crypto pie.

2. Anonymity

Anonymity is one of the most significant advantages for institutional investors wishing to invest their own money in crypto assets on financial markets. Since absolutely all crypto transactions on the blockchain network are confidential and are not directly accessible, it eliminates the possibility of using the personal data of recipients and addressees for fraudulent and criminal purposes, including money laundering. This also helps eliminate the control of crypto transactions on the network by the state and other financial structures.

3. Liquidity

Both institutional and individual investors are always looking for liquidity, high trading volumes, and cryptocurrency markets can certainly satisfy this requirement. The existence of numerous digital currencies gives a wide range of choices for investing one’s money, and individual projects are capable of generating fantastic returns with the right trading style.

Drawbacks of Crypto Investing

Now let’s talk about the disadvantages of investing in cryptocurrency assets, which will help you choose a competent trading strategy and avoid unnecessary risks.

1. Volatility

The volatility of cryptocurrency assets is the most dangerous factor to consider when trading them. The law of supply and demand is one of the main factors influencing cryptocurrency rates: the higher the demand and the lower the supply, the higher the price, and vice versa. Thus, the asset’s value will decrease if demand is relatively low and supply is high. Meanwhile, unlike fiat (traditional) currencies, the supply of cryptocurrencies is always limited. Consequently, the need for it will remain the same. At the same time, interest in different cryptocurrencies can vary significantly.

2. Contingency

Due to the lack of proper control in the field of cryptocurrencies, there is a danger associated with the inability to predict the behavior of a particular financial institution in the trade. Basically, we are talking about cases when crypto exchanges or crypto projects collapsed, leaving many institutional investors as well as retail investors without money and, even worse, without a way to get it back. Therefore, in order to minimize this risk, market participants always look only for proven and reliable companies in which it makes sense to invest their money.

3. Fraud

This flaw stems from the previous one and implies any kind of fraud by criminal organizations, resulting in both institutional and private inverters losing large sums of money. This problem does not exist only in the crypto market, but causes a lot of inconvenience to those who want to increase their capital. Despite this, crypto investing is a great way to diversify your investment portfolio, while trying to be cautious and vigilant.

Conclusion

The global financial system is changing, allowing retail investors as well as institutional investors such as pension funds, hedge funds, and banks to generate even more income in the financial markets. The banking system is also changing as money changes, which today, by going digital, is changing not only the way the financial system works, but also the course of economic history. Thanks to such changes, digital money will become the dominant payment instrument, replacing traditional money.

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