Digital assets are items you can buy, sell, and hold online, but typically can’t physically see or touch. They can be in the form of digital currency itself, or they may be the underlying works that are traded using blockchain technology. Either way, their value, like all assets, comes from a claim to ownership.
Because they’re a relatively new and unique asset, it’s essential to understand how digital assets work and the unique risks and opportunities they present. This article will introduce you to the many types of digital assets that exist, how they are traded, and what’s at stake, so you can decide if investing in them makes sense for you.
Definition and Examples of Digital Assets
Digital assets are anything that can be stored and transmitted electronically through a computer or other digital device, and are associated with ownership or use rights. Well-known examples today include cryptocurrencies and non-fungible tokens (NFTs). While you can’t hold digital assets with your hands, they are real assets that you can buy, sell, store, and trade online.
Cryptocurrencies and NFTs are individually recorded and authenticated through a public blockchain. Among cryptocurrencies, some popular digital assets include Bitcoin, Ethereum, Cardano, Solana, Polkadot, and Dogecoin. NFTs—the newer of the two concepts—can represent various properties, including artworks, collectibles, virtual reality and gaming items, domain names, and ownership records.
Cryptocurrencies may be bought and sold using accounts with cryptocurrency exchanges or participating brokerages, and through a standalone digital wallet. When it comes to purchasing and holding NFTs, you’ll need the same digital wallet you use for compatible cryptocurrencies.
Since the market for digital assets is relatively young, new cryptocurrencies and types of NFTs pop up frequently. As a result, regulation and standardization is often changing.
How Digital Assets Work
There are some brokerages and exchanges that allow you to buy, sell, and exchange cryptocurrencies without your own crypto wallet, such as through an app or online marketplace. However, serious digital asset investors use a software or hardware wallet explicitly made for digital assets.
Digital assets may be created in a variety of ways and must be held by a digital wallet, commonly called a cryptocurrency wallet or crypto wallet.
Every digital wallet has a unique public address and private keys. The public address allows you to receive digital assets, while the private keys give you access to your assets if you want to send to another address or sell them.
Just like the string of text that makes up your wallet address and private keys, every digital coin and NFT has a unique address. Every digital asset is tracked using a large public database called a blockchain. Transactions are then verified in groups called blocks and maintain a history of the ownership of the digital asset since inception. This enables a secure, trusted network where anyone can participate.
Digital assets are semi-private, in that your wallet address is public, and anyone can see which assets a wallet owns at any given time. However, unless you share your identity, it’s challenging to figure out who owns each wallet.
How to Get Digital Assets
The easiest way to get started investing in digital assets is by using an exchange like Coinbase or an online brokerage like SoFi or Robinhood. These services take care of the technical aspects of investing for you, including creating and maintaining a digital wallet on your behalf, if required. You can easily buy, sell, and exchange Bitcoin and other supported cryptocurrencies with a funded and verified account.
Types of Digital Assets
As discussed, the two most common kinds of digital assets are cryptocurrencies and NFTs. However, there’s no limit to what you may be able to do with a digital asset. In the future, we could see shares of stock, car and real estate titles, and other physical assets eventually move to a blockchain format of ownership.
Though it is debated when cryptocurrencies actually took form, the first cryptocurrency transaction occurred in 2010, and more recently grew into a serious financial asset. As of October 2021, the total Bitcoin market is worth more than $1 trillion. The second-largest cryptocurrency, Ethereum, is worth more than $400 billion.
You can buy physical Bitcoin coins in addition to the digital asset, but those are just collectibles. Only the digital version of Bitcoin carries a five-figure price tag online.
Anyone with an active cryptocurrency wallet can send funds to any other compatible wallet. Not all cryptocurrencies and wallets are compatible, though, so it’s vital to know that you have the correct type of address before sending. Cryptocurrency transactions are not reversible and funds are not recoverable in the event of an error.
Non-fungible tokens, commonly called NFTs, represent artworks and other content presented in digital form. Where every Bitcoin is the same, each NFT is a unique asset. However, you’ll use the same technology to buy, sell, and trade NFTs as cryptocurrencies.
You can find NFTs for sale in large public marketplaces, including sites like OpenSea and Rarible.
Pros and Cons of Digital Assets
Public system where anyone can participate
Highly secure when used properly
Semi-anonymous asset ownership
Requires some computer knowledge
Unable to fix blockchain mistakes
Potential for fraud and losses
- A public system where anyone can participate: Anyone with an unblocked internet connection can participate in the digital asset marketplace. When investing in the stock market, for comparison, there are occasionally income limits that prevent the average investor from taking part.
- Highly secure when used properly: Blockchain technology gives you the ability to securely store assets online or offline, depending on your preferences and knowledge.
- Semi-anonymous asset ownership: In many ways, digital assets allow you to act as your own bank with some level of anonymity.
- Requires some computer knowledge: Cryptocurrencies and NFTs are more complex than email. If you have experience with an online stock trading account, you should do well with major cryptocurrency exchanges.
- Unable to fix blockchain mistakes: If you send assets to the wrong address or a wallet that isn’t compatible, you can’t reverse the transaction. For that reason, it is important to be very precise with your information when investing in digital assets.
- Potential for fraud and losses: The semi-anonymous and global nature of digital assets make it a target for fraud. Also, because they are relatively new and volatile, there is very little government regulation, adding additional risks of investment losses.
Are Digital Assets Worth It?
Digital assets have turned many people into cryptocurrency and NFT millionaires; however, there are many risks involved in investing in digital assets.
There’s no certain future for digital assets, so it’s up to you to decide if digital assets are a worthwhile risk for your portfolio. Before investing in digital assets, consider the risks or even speak with a financial advisor. It’s wise to avoid investing more than you can afford to lose.
- Digital assets are anything that can be stored and transmitted electronically through a computer or other digital device, and are associated with ownership or use rights.
- Cryptocurrencies and NFTs are two popular examples of digital assets.
- Anyone with modern computer skills can participate in the digital asset economy, so long as they prepare ahead and weigh the risks involved.