Making headlines around the world is the recent downfall of billionaire Samuel Bankman-Fried, founder and former CEO of cryptocurrency trading firms FTX and Alameda Research. Ever since, the role of cryptocurrency and other assets in the greater economy is seeing a significant bump in interest and scrutiny. While crypto assets are becoming more and more mainstream, many people are still unsure of exactly what they are and how they work, as well as their role in the world of finance.
What Are Crypto Assets?
Because they aren’t tangible, crypto assets can seem a bit – well - cryptic. They aren’t intangible in the way that you make a credit card payment online by electronically transferring money from your bank account, because, theoretically, you could go to the bank and withdraw that tangible money if you chose. Instead, crypto assets are strictly virtual assets that never become tangible themselves, though they can sometimes be exchanged for tangible goods.
Common Types of Crypto Assets
The term crypto assets is often used interchangeably with cryptocurrency. However, crypto assets encompass a broader spectrum of digital properties, with one of them being cryptocurrency.
Some of the most common types of crypto assets1 include:
- Cryptocurrency – The most well-known asset is cryptocurrency, a virtual currency that was created to make secure transactions over a computer network. These transactions are recorded on public ledgers housed on the internet. Since the currency is digital, it requires a system to protect it from being endlessly duplicated or easily accessed, which would make its value plummet. That’s why cryptocurrencies have a finite supply of “vaulted” coins, and it’s also why their value can fluctuate. For example, Bitcoin, the original cryptocurrency, has a cap of 21 million coins that will ever be in circulation, so as more people start using Bitcoin, the demand increases and the value goes up. Other cryptocurrencies are being created on a regular basis, but not all gain traction. Some of the most popular ones currently in use include Ethereum, Tether, Dogecoin, BNB, and USDCoin2.
To gain access to the cryptocurrency units and record transactions, a process called mining is used. Through cryptography, a complex mathematical problem is solved using powerful computer hardware and software, which gains access to “new” coins. Then transactions are conducted, with each transaction containing its own “block” of information on a linear chain that must be decrypted (blockchain technology). This decrypted block verifies the transaction and uncovers the details of how much cryptocurrency was “spent,” to whom it was sent and when. This technology also ensures, through the public ledger, that only one person owns each digital coin at a time because the transactions can be verified by multiple users.
Because of the finite supply of the currency, the “prize” goes to whoever can solve the mathematical problem for each coin first. It should be noted that this has created a mining race that puts average individuals at a disadvantage because they don’t have the pricey resources to quickly solve the problem. At the same time, the race has created an energy dilemma because of the tremendous amount of electricity that those with resources can access to operate computer systems that are often chained together to generate more computing power.
- Utility Tokens – These tokens are not the same as currency. Instead, like all tokens, they utilize existing blockchain infrastructure. With utility tokens, a product or service provider gives access rights to their product or service, whether for purchase or while the product/service is still in the development phase. This gives the token buyer a form of exclusionary access within that issuer’s network. As noted, the tokens use the existing ledger or blockchain platform to provide and verify the access.
- Security Tokens – Often used like an investment in a start-up or seed money for a project, businesses can offer security tokens in exchange for fiat money or other crypto assets. This gives the business the money it needs, and the security token gives the purchaser a stake in the business venture that may also include benefits like voting rights, profit sharing, or dividends. This type of crypto asset comes with the same risks as any new business investment.
- Non-fungible Tokens – A relatively new form of crypto asset, non-fungible tokens are unique in that they are not interchangeable with other tokens - you can’t get another non-fungible token to replace yours. That’s because each token represents ownership of a distinctive tangible or intangible object – no two are the same. These tokens also exist on a public ledger or blockchain that records ownership and verifies authenticity. Examples of non-fungible tokens include digital content like artwork, a video, virtual real estate, or even a famous tweet.
How Are Crypto Assets Controlled?
Cryptocurrency is not considered legal tender. As such, it is not issued or regulated by a central bank, authority or government, so it must use a decentralized system to record transactions and release new units. In fact, one of the reasons cryptocurrency was developed was the allure of it having a decentralized platform, which allows those who hold the assets to use them directly, person to person, without taxation or regulation. The public ledger is also maintained by those who use the decentralized system. This allows the database to be distributed across the internet and have transactions verified by multiple members before they are added to the blockchain (distributed ledger technology – DLT). Because of the blockchain format, ledger security is tight and the transactions, as well as the data accompanying them, are irreversible.
Risks and Benefits of Crypto Assets
Every financial investment comes with risks and benefits. Crypto assets are no different and may carry a bit more of both.
Some of the risks of crypto assets include:
- Price fluctuation – The price of cryptocurrencies can be volatile, going up and down in a short period of time due to a wide range of factors.
- Regulation ambiguity – As crypto assets become more mainstream, governments will undoubtedly develop and impose new regulations on the market, making investment tricky as those emerge.
- Lack of security – As more cryptocurrencies and trading platforms emerge in an unregulated industry, the opportunity for fraud and cyberattacks increases. With more than 20,000 cryptocurrencies currently in existence and up to four fifths of crypto trading on crypto exchanges being counterfeit3, investors must do their research to understand who created the currency, the technology the coins are based on, the likelihood of businesses accepting it, and if it will grow in value.
- No back-up – If stored in a digital wallet, you may lose your crypto funds if you lose your private key, your hard drive crashes, or a virus infects your wallet/computer/phone.
- Environmental impact – Validating transactions uses large amounts of energy, which can disproportionately allocate resources to mining and put a strain on the environment.
Some of the benefits of crypto assets include:
- Decentralization – Cryptocurrencies and their transactions operate outside the control of a single government or central bank.
- Universal access – Anyone who has access to the internet can own and trade in cryptocurrency.
- Blockchain technology – Because cryptocurrencies and transactions use blockchain technology, all transactions are fully public and immutable.
- Efficient transactions – Most crypto transactions have lower fees and faster transfer times than those at regular banking institutions.
- Increasing acceptance – More and more financial institutions and businesses are beginning to trust and accept cryptocurrencies as their use becomes mainstream.
- High return potential – Despite their risks and volatility, cryptocurrencies have the potential to yield high financial returns.
Crypto as Part of Finance
No degree in finance would be complete in today’s market without addressing the role of crypto assets in the economy. As part of Ottawa University’s Bachelor of Science in Finance (BSF), training includes an in-depth exploration of cryptoasset markets because of how financial markets have been affected by crypto over the last decade. Students graduate with an understanding of cryptoassets as stores of value, as well as crypto portfolio management, risk analysis, and market efficiency.
Other courses provide a strong foundation in finance surrounding the principles of accounting, financial instruments, capital planning, funds acquisition, asset and debt management, budgeting, financial risk management, and traditional investments and portfolio management. This robust education comprehensively prepares students to plan, manage, and analyze the financial and monetary aspects and performance of business enterprises, banking institutions, or other organizations.
The Finance Program at Ottawa University just completed a three-year assessment period that showed Ottawa University finance graduates are substantially outperforming finance graduates of other institutions on outbound exams both locally and nationally by more than 5 percentage points.
Get started on your finance degree to begin a career that is replete with opportunities in today’s global business world. Speak to an enrollment advisor today!