Digital Asset Trading: What is it, Why is it Important & 6 Types You Can Trade

By Chika

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Last Updated: October 21, 2022

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Due to increased interest in cryptocurrencies over the past two years, there has been a steady increase in interest in trading digital assets.

Both retail and institutional investors are starting to recognize the potential of digital assets to transform traditional finance. 

However, the majority of people still find it difficult to understand how digital assets work and how they might participate as active investors in this fascinating new market. We define digital assets and their many categories in this post.

 

 

What is Digital Asset Trading?

Anything created and stored digitally that is considered to have worth and comes with a specific usage right is referred to as a digital asset.

The buying, selling, or securitization of virtual assets is referred to as "digital asset trading."

Digital assets were previously used to describe images, movies, scanned papers, or media formats.

However, as blockchain technology has grown, the phrase has steadily evolved to encompass assets that are supported by a distributed ledger (blockchain).

Some examples of digital assets are:

Trading in digital assets is mostly made possible via brokerages and exchanges, which let you purchase, sell, or trade the assets of your choice.

You open a brokerage or exchange account. This could be done through an app or an online market depending on the platform. Although more seasoned traders store their digital assets on hard wallets, digital wallets are where exchangeable assets are kept.

 

 

5 Reasons Why Digital Assets are Important 

1. Transaction Transparency

The creation (minting) or exchange of digital assets is made possible by blockchain technology. Because all transactions are recorded on the public digital ledger, employing blockchain has the significant benefit of promoting transparency.

This generates a flow of information that makes it simple to track transactions or develop audit trails.

 

2. Decentralized Finance (DeFi)

In centralized finance, banks and other vendors who serve as middlemen in financial transactions hold your money.

Accordingly, in order to facilitate transactions between parties, each middleman charges a fee. Because smart contracts allow for the automatic transfer of digital assets between parties, DeFi does away with the need for middlemen.

Using a centralized banking system would have required paying intermediaries transaction fees and other expenses.

 

3. CeFi Actors

In cryptocurrency lingo, CeFi stands for centralised finance.

This financial system combines conventional financial services with trading in digital assets. Users can borrow, save, invest, or lend digital assets on the platforms of CeFi actors like Binance or Coinbase.

By providing these services, CeFis fills the gap between conventional finance and trading of digital assets.

 

4. Exchanges

A trading platform for digital assets and their underlying financial instruments is offered by exchanges.

They serve as exchanges where buyers and sellers of digital assets can meet and transact. Commissions are assessed by exchanges for each transaction made on their system.

 

5. Asset tokenization

Retail investors now have access to digital assets through tokenization that they previously would not have had through conventional financial institutions.

The ability to buy tokenized small portions of traditional assets raises the potential for profit and also adds liquidity to the capital markets. Accordingly, since individual investors don't need a lot of money to start trading in assets, it also levels the playing field for participation in the capital markets.

 

 

6 Examples of Digital Assets You Can Trade

If you are looking for digital assets to trade, here are some options you can consider. 

1. Cryptocurrency

A cryptocurrency is a form of digital money that is protected by blockchain-based encryption techniques.

The volume of transactions on a cryptocurrency's blockchain determines its value, making cryptocurrencies a type of virtual currency.

In the years since cryptocurrencies first appeared in 2009, more than 12,000 different types have been developed.

Bitcoin, Ethereum, Cardano, Tether, and USD continue to be the most popular coins for trading.

 

2. Stablecoins

Stablecoins are digital currencies made with price stability in mind.

They are intended to be steady, as their name suggests. Stablecoin values are connected to other assets or financial instruments, such as fiat currencies (such as USD), commodities (such as Gold), or other digital assets, in order to make this possible (e.g. DAI).

 

3. NFTs

Digital assets called Non Fungible Tokens (NFTs) are used to signify ownership of things like works of art, collectibles, video games, avatars, and real estate. This is used to verify ownership of an NFT because the tokens are distinctive and irreplaceable.

 

4. Asset-backed Tokens

Asset-backed tokens are tokenized units of value that are linked to tangible assets like gold, stocks, real estate, or oil.

Tokens enable the fractionalization of assets into smaller units, making it feasible for retail investors to acquire a portion of a pricey or scarce asset. The worth of the underlying asset determines how much an asset-backed token is worth.

 

5. Commercial Real Estate Tokens

This is a unique kind of asset-backed token for commercial real estate.

Real estate can be traded in fractional (smaller) units thanks to these digital assets, which turn the value of real estate into tokens.

 

6. CBDCs

Central Bank Digital Currencies (CBDCs) are a sort of digital asset that stand in for a country's fiat currency and are supported by its central bank.

CBDCs are only virtual versions of fiat money. Therefore, they could be used for international transactions or to reduce risk when trading cryptocurrencies.

 

 

Final Thoughts on Digital Asset Trading

Digital assets, such as cryptocurrency or NFTs, and the evolution of Web3 and the metaverse are game changers.

We’ve entered a new era, and now is the time to understand the space and find your opportunities. They are no longer a far-fetched idea—crypto and other digital assets are here to stay. 

However, like the internet in its early days, those that are able to understand the investment opportunities in this space will benefit from first mover advantage.

Developing a strategy can prepare you for the future of digital asset trading. There is no singular playbook for digital asset strategy. But with a strong and strategic approach, you can trade profitably in this space. 

Photo by Karolina Grabowska

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