Cryptocurrencies became a brand new card on investors’ table in 2015-2016, were everyone’s darling a year later and largely disappointed most buyers in 2018. Aside from infrastructure and regulatory issues, this was due to their failure in delivering any actual backing for the market value grossed. This inspired a call for new subclass which is asset backed tokens that actually have some physical collateral behind them.
Effectively, this mechanism opens up a whole investment universe allowing to buy into tiny fractions of underlying assets which include precious metals, gems and diamonds, real estate, land, intellectual rights, art and other collectibles.
We in D1 Coin see clearly this as a trigger to revolutionize diamond industry providing millions of investors globally with an access to growth opportunities combined with tangible downside protection.
To start, let’s look at a few prime categories of assets that many investors, like yourself, look into when first deciding to invest in a physical asset. It’s important to have a basic grasp of these assets. Before asset backed cryptocurrencies (we’ll cover those later) leveled the playing field, there were mainly four investment vehicles for value based investing outside of stocks, bonds, and options: precious metals, real estate, diamonds, and collectibles.
These metals are the most accessible physical assets that have achieved widespread use and popularity. They are also the first physical assets typical investors wet their feet in. It’s incredibly easy for anyone to buy gold, silver, and platinum through stores like pawnshops or through traditional brokers like the national mint in most countries.
Less acknowledged, but arguably the most widespread form of physical investing is through real estate. Nearly every person on the planet dreams of owning their own home at some point and business owners often attempt to purchase a place to open their storefront. All of these purchases are made within the real estate market.
Rare, precious, and captured in the hearts of anyone who sees them, precious stones represent the third most prevalent class of physical investing. Natural investment-grade diamonds are considered to be the epitome of investing in precious stones, however the asset field currently suffers due to limited liquidity and high cost of entry.
The final class of value based investing is the collectible market. This asset class encompasses categories such as art, pop culture items, and pieces to popular games. While the class as a whole has gained some fame, it still remains enclosed within each individual category with its own fan base.
Asset backed tokens take these distinct areas of investment and put them on a level playing field.
Asset backed tokens, by definition, are cryptocurrency tokens representing, either whole or in part, the worth of a physical item with a monetary value. One of the most common asset backed coins is the (so-called) stable coin or those hedged to the value of a 1–1 ratio with a specific currency.
Just how do we take a physical object, digitize it, and ascribe it’s value among the users wishing to invest in it?
We use a process called tokenization.
Though the process has been existent long before cryptocurrency has been popular, utilizing these methods required frankly absurd amounts of trust.
You, as the investor, would first have to confirm the one digitizing the asset actually owned it, typically proven by a receipt or picture. Then, the owner would receive funds and take down a list of which investors owned what portion of the asset, like dividing who paid for what portion of a pizza. Finally, the investor would be ascribed points supposedly equal to the value of the asset.
The key problem that existed was that the issuer of the points was responsible for making sure that physical assets actually backed the points issued. There was no real way for investors to verify that these points even had value at all as a bad actor could simply change their total to add asset value to their pocket. Some of these systems even suffered from massive inflation due to such manipulations, causing the points to become nearly worthless.
With the innovation of cryptocurrency and smart contracts, physical assets can now be broken down digitally and verified. Then, the resulting tokens can be linked to the asset and inflation is controlled by the maximum supply of that token. Another benefit is fully verifying which wallet owns what portion through the blockchain verification process. This helps weed out any bad actors that might try to alter their totals or ascribe fake value to the physical assets.
Cryptocurrency’s form of tokenization eliminates two of the largest risks from the market, enabling safer trading of physical assets.
With safer trading, comes the ability to tokenize nearly everything, from precious metals to real estate and even to diamonds. Where the high cost of certain asset classes like diamonds and real estate may have locked out less wealthy investors, tokenized assets can take advantage of being able to break up what would be an enormous single sum purchase into smaller portions.
So how can we tell whether a coin is truly asset backed?
Alpha Week has published an excellent article on how to identify true and trustworthy asset-backed tokens, calling it their ‘litmus test’. There are four main factors we have to address when looking for great investments in this transformative asset class: transparency, veracity, custody, and convertibility.
Can you identify and see what asset a particular token is linked to? A good asset backed token will have two ledgers. One that verifies transactions and another that verifies the details of the assets attached to the coin like who owns them.
While anyone can create a token, asset backed tokens need to have proof of the underlying asset’s existence. A regular audit of the assets by a reputable firm needs to be maintained and publically viewable.
Even with digital versions floating around, the physical assets still need to be protected. The assets should be held in escrow by an independent and well reputed company. Insurance should also be maintained on the asset with proper protections for it accounted for.
Finally, a true asset backed token should be able to be cashed out, or turned into the asset it’s being backed by. True asset backed tokens will have no restrictions to this clause and this is the step many asset backed tokens fail, falling victim to restrictions put in place.
Here at D1, we take these four factors very seriously.
Throughout our entire process, we have thoroughly applied these four rules to the D1 Coin. We start with genuine GIA certified diamonds and hold them in custody with the best vaults Swiss and Singapore banking has to offer. To top it all off, D1 has regular public audits to confirm current vault holdings.
Any time a D1 Coin holder has enough tokens to satisfy the requirement to purchase a diamond from the D1 Reserve, the holder is able to easily do so. With a large variety of delivery options and diamond selections, this conversion process is made seamless.
The creation of these asset backed tokens will allow investors with lower account limits to take full advantage of a variety of markets. In the past, smaller investors may have been limited to only a small amount of gold or a single-family home purchased for their family.
Asset backed tokens allow all types of investors to diversify their portfolios at varying degrees. You can now take only a portion of gold, land, diamonds, etc. and grow your investments over time.
This is the future D1 Coin is contributing to and happy to be a part of. With GIA-certified diamond backed tokens, we introduce investors to a whole new market. We are allowing you to invest in precious stones with a lot more ease and security than ever before. With D1, you can buy, spend, and save in a currency backed by the diamond standard.
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