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Are Digital Assets Like Cryptos a New Asset Class?

Digital Assets Like Cryptos

June 4, 2021 | 

938 Views | 

JOHN K MWANIKI | 

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As much as digital assets like cryptos are still new, they still play a role in finance. There have been hurdles to get around. Most investors are still yet to wrap their heads around digital currencies. That includes even the popular ones like bitcoin.

Already, over 100 million people across the globe are using cryptocurrencies. More people, from baby boomers to Gen Z, have an interest in digital currency. Digital currencies still face opposition and polarized opinion. Yet, they are booming. That is thanks to blockchain's wide acceptance. 

Worth noting is that digital assets are non-correlated assets. This means they are not related to any other traditional asset classes. While there are different types of cryptocurrencies, they still qualify as assets. Some categories of cryptos include protocol tokens and security tokens. 

Cryptocurrencies are top-performing assets. For this reason, investors need to start looking at them and include them in their portfolios. This has not been the case as most investors still don't understand the technology and its benefits. 

Why digital assets like cryptos are a new asset class

Digital assets like cryptos have a set of characteristics that qualify them as asset classes. Here are some digital currency features that qualify them as a new asset class.

1. Price independence 

Digital assets like cryptos are a new class of assets. This is due to their non-correlation with other asset types. The non-correlation with other assets is an excellent argument for investors to include them in their portfolios.

The performance of cryptocurrencies like bitcoin has nothing to do with how other assets like stocks and bonds behave. Compared to the correlation the traditional assets have with each other, it is very low in digital assets. 

When you are thinking of having an ideal portfolio, such uncorrelation is attractive. Note that by adding an uncorrelated asset to your investment portfolio, you provide the ideal diversification. This is to mitigate the market risk caused by the underperformance of the other assets.

Digital assets like cryptos reduce the risk in investments. That is without weighing down the performance of the mix.

2. Investability

The Investability of digital assets like cryptos also an indicator of them being assets. You can take cash and the money in your account; you can convert them into digital assets. The established digital assets like bitcoin have a high trading volume.

Their liquidity also almost matches that of traditional assets like gold. Digital assets like crypto have shown a high potential for liquidity. This will rise with time. That is, as cryptocurrencies receive more widespread acceptance across the globe. 

The Investability of digital assets is appealing to traders and investors. More people will want to have a cryptocurrency in their portfolio. That is in the place of equity as part of their portfolios. There is a wide range of investment channels for digital assets like cryptocurrencies.

3. Stable aggregation 

The stability of digital assets contributes to their conformity to asset class. Blockchain technology contributes to their stability. For instance, through halving, bitcoin has been able to maintain stability. Through this, the blockchain can manage the demand and supply. This makes the asset stable. 

Cryptocurrencies are set to become more stable as time goes by due to other factors. They include increased liquidity, the involvement of institutions, regulatory developments, and global participation. The fact that you can add no other assets to this class has played a role in its stability. Stability is a characteristic of good assets.

4. Risk-reward profile

Investors can assess the opportunity of digital assets as an investment opportunity. Traders can clarify the nature of digital assets like cryptos in terms of returns and risk. The Sharpe ratio for cryptocurrencies is measurable. This is to determine how much excess returns an investor ought to get due to the volatility of an asset. 

Traders can use the ratio to determine their earning potential for holding digital assets. You can profile cryptos according to their risk and returns. This is exhibits asset class characteristics. 

5. Internal homogeneity and external heterogeneity

Internal homogeneity is among the essential features that an asset class must have. Note that digital assets such as cryptos are not distributed. Their use depends on the market cap. While that is the case, cryptocurrencies display internal homogeneity. They have similar characteristics, performance, and risk characteristics.

Cryptos feature external heterogeneity of cryptos, making them meet asset class requirements. The external heterogeneity of cryptos causes a high deviation. This is from the normal distribution of returns. 

6. Selection skill

An investor should not have special skills to select an asset. The internal homogeneity of an asset class supports this. This is whereby assets in the same class have some similar characteristics. Also, they bring the same exposure. 

The availability of indices also eliminates the burden of an investor picking specific cryptocurrencies. Digital assets meet this rule, making them an asset class.

7. Expected utility

Utility is the benefits consumers and traders expect to get from certain goods or services. Understanding the utility of an investment will be useful. It will help investors make more suitable investment decisions.

When you add an asset to your investment portfolio, it should either increase returns or lower the risk. This is possible in two ways; heterogeneity and an asset having a high return and low risk. 

Cryptocurrencies like bitcoin can increase the expected utility of a portfolio. This is because of the uncorrelation to other asset classes. 

Why digital assets like cryptos are a new asset class

Digital assets like cryptos are yet to receive the acceptance and popularity. That is compared to traditional asset classes like stock and real estate. Yet, they meet the requirements of an asset class. Digital assets conform to several asset class requirements. 

That is, expected utility, stable aggregation, and Investability. Price independence, internal homogeneity, and external heterogeneity are also among the requirements. Cryptocurrencies are unique. Investors can add to their portfolios and get benefits. 

Their features are like those of asset classes. There are two categories of digital assets: tokens and coins. Investors are still trying to understand blockchain technology. Once they are conversant with it, more of them will be holding the assets.

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Total Market Cap The Total Market Capitalization (Market Cap) is an indicator that measures the size of all the cryptocurrencies.It’s the total market value of all the cryptocurrencies' circulating supply: so it’s the total value of all the coins that have been mined.

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