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Subject 2. Digital Asset Investment Features PDF Download

Digital assets differ from traditional financial assets in terms of their inherent value, transaction validation approach, uses as a legal medium of exchange, and legal and regulatory protection.

Here is another perspective to understand some key differences:

  • Nature. Traditional financial assets, such as stocks, bonds, and commodities, are tangible or intangible instruments representing ownership, debt, or participation in an underlying asset or entity. Digital assets, on the other hand, are purely digital or virtual in nature, existing on decentralized blockchain networks.

  • Regulation. Traditional financial assets are subject to established regulatory frameworks and oversight by financial authorities in various jurisdictions. Digital assets, especially cryptocurrencies, operate in a rapidly evolving and often fragmented regulatory landscape. Regulatory frameworks for digital assets vary significantly across countries, and the level of oversight and legal protections can differ.

  • Intermediaries. Traditional financial assets typically involve intermediaries such as banks, brokerages, and clearinghouses, which facilitate transactions, custody assets, and provide various financial services. Digital assets, particularly cryptocurrencies, operate on decentralized blockchain networks that aim to eliminate the need for intermediaries by enabling peer-to-peer transactions and self-custody.

  • Transparency. Traditional financial assets are subject to regulatory reporting and disclosure requirements, which promote transparency. Digital assets, particularly privacy-focused cryptocurrencies, can offer varying degrees of transparency. While transactions on blockchain networks are generally transparent, the identity of participants can be pseudonymous or anonymous, providing a different level of transparency compared to traditional financial systems.

  • Market Structure. Traditional financial assets trade on regulated exchanges, with established trading hours and centralized order matching systems. Digital assets trade on both centralized and decentralized exchanges, and trading can occur 24/7. The liquidity, trading mechanisms, and market infrastructure for digital assets can differ significantly from traditional financial markets.

  • Valuation. Valuing traditional financial assets often relies on fundamental analysis, financial statements, market data, and established valuation models. Digital assets present unique valuation challenges, as they often lack traditional fundamental data, cash flows, or earnings. Valuation methodologies for digital assets may involve factors such as network adoption, technological developments, and market sentiment.

  • Investor Protection. Traditional financial markets have established investor protection mechanisms, such as regulations for disclosure, fraud prevention, and investor compensation schemes. The level of investor protection for digital assets can vary, and investors may have limited recourse or legal protection in case of fraud or loss.

Investible Digital Assets

The most common digital assets are cryptocurrencies, including Bitcoin and altcoins. Unlike other cryptocurrencies like Bitcoin or Ethereum, which can experience significant price volatility, stablecoins aim to minimize price fluctuations and provide stability. There are also digitalized tokens that include non-fungible tokens, security tokens, utility tokens, and governance tokens.

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