Digital Assets – Pros & Cons For Investors
Digital Assets – Pros & Cons For Investors
These days it’s almost impossible to open the financial pages without seeing reference to new investment opportunities in digital assets like cryptocurrencies and NFTs. But that doesn’t mean we should throw the baby out with the bathwater and turn our backs on physical asset investment. In this article we take a look at the pros and cons of investing in the more traditional physical assets, as well as digital assets, most particularly the new kids on the block, crypto and NFTs.
These are traditional assets we are all very familiar with. Property, gold, cash, artworks. They provide a sense of security because we can and see and touch them. Physical assets also tend to be less volatile than their digital cousins.
Pros – This type of asset is familiar and widely accepted and understood. It can also be used for purposes other than investment, like wearing gold jewellery, or living in a property.
Cons – There is often a high barrier to entry, especially with property, and physical assets are not always very liquid, as they rely on someone wanting to buy them in order for you to realise their value. Particularly with property, fractional sale is difficult. In other words, it is not possible to sell part of your investment. Nobody will buy your bathroom without the rest of your house!
What we mean by digital assets is those which are owned, stored, and recorded in a digital format.
Traditional Digital Assets
As with physical assets, we have been investing in traditional digital assets for many years. These include shares, managed funds, and EFTs.[i] The key difference between these assets and the new style of digital assets is they usually have a physical entity behind them, even though your interaction with them is entirely digital. A managed fund might be investing in property and cash, for instance, and shares provide investment funding on which companies can operate.
The New Digital Assets
In recent years two new digital asset classes have been added to the suite of investment options available. These can be a little difficult to get your head around. Because not only are they digital, but there is no physical entity behind them.
It should be said, these new digital assets are extremely high risk, and as such should be incorporated into your investment portfolio judiciously.
First and foremost, cryptocurrencies are not legal tender. As such they are not backed by any physical assets, and the platforms selling them are not regulated by ASIC. They are therefore not protected by government financial regulations.
Essentially, when you buy cryptocurrency, you purchase a token, or part thereof, via a crypto trading platform, which relies on blockchain technology to record the purchase. Very few merchants accept crypto currency, which means you will need to convert it to legal tender if you wish to use it.
There are a number of cryptocurrencies available, each with their own unique features, but all of them are highly volatile.
The key word here, and one which most people don’t understand is fungible. In essence, fungible means replaceable. So really, what we are saying is Non-Replaceable Tokens.
In this context, what you are really buying is the original version of a digital entity. For instance, the first ever tweet was recently sold as an NFT for nearly $US3m. Yes, that tweet can be copied and retweeted, but the original tweet is now owned by one man. You could think of it like the difference between owning a painting, or a print of a painting. Except that it’s all digital.
NFTs are available in things like digital art, music, tweets and even sports clips, and are stored on a blockchain website. They can be bought via NFT trading sites like OpenSea.
Pros – There is generally a very low entry cost for digital assets compared to physical ones. They are more liquid, since you can usually sell them with a few clicks of your mouse. They also offer fractional ownership, meaning if you wish you can sell a portion of your investment and keep the rest.
Cons – Digital assets, particularly Cryptocurrencies, tend to be more volatile than physical assets and will therefore increase the risk profile in your portfolio. The security of your investment is limited by the skills of hackers, and if that occurs, it is very difficult to retrieve digital investments. It is also easy to be seduced into investing in digital assets, particularly Crypto and NFTs, for the wrong reasons. Just like any investment, you should do your research and not just invest to avoid ‘missing out’.
Diversification is Finance 101. However, and wherever, you decide to invest, diversification is vital. Be guided by your life goals, financial situation, and appetite for risk, and don’t allow the next shiny new thing to distract you from a well-developed strategy. That is the key to success.
If you would like to talk about where digital assets and physical fit in your overall portfolio performance, the team at Manly Financial Services have the knowledge a experience to steer you in the right direction. Give us a call on (02) 9976 3388 or contact us via the below link.