Digital Asset
At its simplest, a digital asset in the world of cryptocurrency is a type of virtual currency that depends on cryptography for its creation and management. The concept of a 'digital asset' might be hard to get to grips with because it is intangible - you can't physically touch or hold a digital asset like a bitcoin the way you can hold a physical dollar bill. However, it's easiest to think of them much like the money in a bank account - you can't physically touch it, but it has value you can use to buy things or is an investment that can increase or decrease.
Understanding Digital Assets
Types of Digital Assets
The term 'Digital Assets' encompasses a few different forms:
- Bitcoin: The first and the most well-known digital asset. It is decentralized, meaning no government or institution has control over it.
- Altcoins: These are alternatives to Bitcoin and are also considered digital assets. Examples include Ethereum, Litecoin, and Ripple.
- Tokenized Assets: These are real-world assets (like real estate or stocks) that have been 'tokenized' into a digital form to be bought, sold, and traded on blockchain networks.
- Utility and Security Tokens: These are digital assets that represent access to a service (utility tokens) or have investment value (security tokens).
How Digital Assets Work
Digital assets operate on technology called blockchain which is a public ledger containing all transaction data from anyone who uses the system. Each time a digital transaction happens, it groups together in a cryptographically protected 'block' with other transactions that have occurred in the same time period and then gets added to the 'chain'.
Why Digital Assets?
People invest in or buy digital assets for a number of reasons. Some people value the fact that digital currencies can circumvent traditional banking systems, thus offering freedom from regulation. Others view digital currencies as an investment opportunity, hoping the value will go up. And some people value the technology that underpins digital currencies - blockchain - and its potential for disrupting many industries beyond finance.
Risks of Digital Assets
Investing in or using digital assets comes with potential risks. These include:
- Value Fluctuation: Much like stocks and shares, digital assets can be volatile and their value can go up and down quickly.
- Security: Although the technology behind digital assets offers a high level of security, they are not immune from hacking.
- Regulations: As digital assets are relatively new and highly disruptive, they are often in a regulatory grey area which can make them risky.