It is common to hear that cryptocurrencies and blockchain technology are going to revolutionize the way nearly every industry does business, but many have been left asking what a bunch of pump n’ dump ICOs have to do with a seismic shift in the way the global economy is organized.
Security tokens are now presenting a unique solution, or “take”, on investing in illiquid assets, and it creates an opportunity for everyone.
The Illiquidity Problem
If you are out shopping, you can buy a product, like it, and then decide to buy shares in the company that makes it. Then, if you decide you no longer believe that company has a bright future, you can easily sell those shares in minutes. However, if you see an apartment building or house in your neighborhood that you think deserves to be priced higher, you can hardly just buy it that day. And you definitely can’t sell it within minutes.
Illiquid investments like this have a disadvantage to assets that are traded on exchanges. The longer holding period brings in more risk, which in turn creates a higher required rate of return. As a result, it is common to see lower prices due to this lack of liquidity.
Security tokens propose a solution where you securitize these assets and make it possible to trade them just like a regular equity. They are essentially a digital representation of your ownership (or share of ownership) of a certain asset. The beauty of security tokens is they make it possible to trade equity in any asset, even the ones which were previously too illiquid for this to be possible.
The Wider Effect
Real estate isn’t the only type of asset that can be helped by security tokens. Small businesses would also be able to raise funds without having to do a complicated equity raise. You also have the route of securitizing artwork and other unique assets. Basically, security tokens have the potential to change the entire finance and investing world.
There are a few effects these tokens may have on the economy. First, they free up funds and make us cash richer in a sense. This allows for money to flow more efficiently, because investors are less “locked in” to investments.
Management of these tokens would still have to have restrictions that are in line with the regulations currently in place. There would still be barriers to access, but the facilitation would be much easier than having to get all the necessary personal connections required to invest in these types of illiquid assets. Instead, you would probably be joining a white list of people who are accredited investors and have the proper residency status.
An Early Opportunity
There are two reasons you should consider expanding your investment portfolio into security tokens. First, it allows you to get exposure to many tangible assets, and that acts as a good hedge against all the high-volatility crypto-assets.
But second, security assets make more sense to the layman, and may end up serving as a gateway drug of sorts. As we saw many new investors pile into Bitcoin in late 2017, we may see even more start to test the water with crypto-assets, and begin with security tokens.
Security tokens are still in their early adaptation phase, but you can purchase them on exchanges like tZero, Blocktrade, and Open Finance. The innovation of being able to lock in funds without locking in investors creates a win-win situation for both parties.
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