Introduction to Digital Assets

INTRODUCTION

As introduced in Alternatives Learning Module 1, digital assets are a relatively new investment class that covers assets that can be created, stored, and transmitted elec[1]tronically and have associated ownership or use rights. This class includes a wide variety of digital assets, including cryptocurrencies, tokens, and digital collectables. Based on the innovative distributed ledger technology (DLT), or blockchain technology, digital assets utilize advanced encryption techniques that assure the authenticity of digital assets. While cryptocurrencies have their own blockchains, crypto-tokens are built on an existing blockchain. As with other types of alternative investments, digital assets have characteristics distinct from traditional investments. Since the advent of Bitcoin in 2009, when it was a niche concept in the technology world, digital assets have gradually become more mainstream alternative investments for investors worldwide. We will give an overview of the common forms of digital asset investments and discuss the key concepts and pitfalls in this space. Despite their special features and technological characteristics, digital assets offer investors diversification while providing higher expected returns than traditional investments provide. However, their risks are also higher. We will discuss the sources of risks in digital assets to provide a better understanding of this evolving asset class.