Fractional investing apps have successfully “democratised” access to investing in the stock market. An individual wanting to invest in a publicly listed company can buy a fraction of a share that would otherwise be too expensive for them as a whole. Technology has made the benefits of investing in the stock market available to a whole new category of investors.
Away from the stock market, at Hedgehog we believe that blockchain technology - including “tokenization” - has the same democratisation impact for ‘real’ assets, such as real estate. Tokenization is a process of issuing tokens on a blockchain that can digitally represent assets in the physical world, and these digital tokens have the characteristics of fractional securities, backed by real-world assets.
When it comes to investing in real-world assets, tokenization is the catalyst for levelling the playing field in four ways:
1. More accessible
As a store-of-value, real assets like real estate have stood the test of time. For generations, people have understood the intrinsic value of physical assets, and appreciated their financial benefits: the combination of rental income and the potential for value to appreciate over time.
Tokenization makes it possible for individuals to access those benefits without needing to buy the whole asset. This is a game-changer when you consider that an asset might have a total value of $100m whereas a Hedgehog token might cost $10k.
2. More “liquid”
Real assets cannot be sold or exchanged for cash easily, making them “illiquid” sales, so this is not a transactional asset class. In private markets - by definition - sales are not carried out in public. Transactions are high-value and infrequent, with lots of intermediaries involved and limited transparency. Processes are expensive and lengthy, as standard. Getting your money out if required is notoriously difficult.
Tokenization provides a mechanism for fractions of real assets to be exchanged between two token holders securely and transparently, with instant settlement. In theory, a transaction can be completed in the same time it takes to buy a cup of coffee.
3. More efficient
The traditional security issuance process is cumbersome and costly, characterised by lots of manual processes involving multiple intermediaries. Distribution, trading and investor relations processes are not standardised and are typically executed manually.
By taking the end-to-end security issuance process on-chain, digital automation replaces paper-based processes and records. Processes ranging from compliance checks to payments can be automated using smart contracts: programs that use computer language to record terms instead of legal language. Automated actions remove the need for intermediaries, leading to increased transparency and major savings in cost and time.
4. More fun!
Tokenization unlocks layers of community and enjoyment value associated with real-world assets. Now, the currency within a community that isn’t backed by a physical asset can be represented by a token that is exchangeable. Social tokens provide members of a community with a currency that can be redeemed for things that have value or utility, including but not limited to things like merchandise.
Members of a community can use social tokens to make statements about what is important to them, the causes they support and their values.
Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment.