Interested in entering the world of digital assets? You can buy digital assets on Gemini today!
At their most basic level, digital assets are assets that are represented digitally. More specifically, digital assets refer to content stored using blockchain technology, including cryptocurrencies like Bitcoin and Ethereum, stablecoins like USDC and USDT, non-fungible tokens (NFTs) and other tokens with more specialized uses.
Blockchain Explained
Blockchains are decentralized public ledgers that exist digitally across a network of computer nodes. In other words, a blockchain uses the power of many computers operating in a network to maintain a record of events. Blockchains differ from traditional databases in how data is stored, using its decentralization to ensure security and immutability.
Blockchains do so by storing pieces of information in sequential storage units called blocks. The sequential aspects of blocks are important because they enable a block, once filled to capacity and timestamped, to be cryptographically linked to the last filled block in a chronological chain of sorts. Doing so constantly and redundantly across the many computers on a blockchain’s network makes the blockchain immutable, given that the network is large and decentralized enough to prevent a malicious actor from controlling the majority of computing power, known as a 51% attack. Large blockchain networks like Bitcoin have never been 51% attacked and likely never will –– however, smaller blockchain networks are subject to a higher risk of this happening.
What Is Bitcoin?
Although blockchains were first conceptualized in the 1990s, their first widespread use case came in the form of Bitcoin, which was the first major cryptocurrency and is currently the cryptocurrency with the highest market cap. Created in 2009 by the pseudonymous Satoshi Nakomoto in response to the Great Recession and the monetary policy of the era, Bitcoin was originally created to be a currency to be used for peer-to-peer exchanges.
Despite this, a few tokenomic (token + economics = a cryptocurrency monetary policy) design aspects of Bitcoin make it a good long-term store of value. Specifically, Bitcoin is strictly limited to an issuance of 21 million coins with a scheduled logarithmic supply rate based on a computational process called mining, such that Bitcoin’s full issuance will not be in circulation until some time in the 2140s. This supply rate in combination with Bitcoin being very divisible means that Bitcoin is much less prone to inflation than any fiat currency, which also makes Bitcoin a counter-inflation hedge on an institutional scale. The trustless and decentralized nature of most cryptocurrencies also further acts in favor of Bitcoin being a robust long-term store of value.
How Is Ethereum Different from Bitcoin?
Bitcoin’s success brought widespread attention to blockchains and their uses for more than cryptocurrencies. Ethereum is a decentralized and open-source blockchain first conceptualized in 2013 by Vitalik Buterin. The Ethereum blockchain acts as a network for decentralized programs called smart contracts. It also allows for the creation of countless varieties of digital assets, most commonly NFTs and ERC-20 tokens.
Ethereum’s emphasis on using blockchains for computations and the storage of code for applications is the biggest differentiator between Ethereum and Bitcoin. In essence, Ethereum is a blockchain network for a wide range of ecosystems and projects while Bitcoin is more of a singular cryptocurrency that can be compared to Ether, which is the main cryptocurrency on the Ethereum network and the second largest cryptocurrency by market cap.
Examples of Digital Assets on Ethereum
Ethereum’s wide spectrum of digital assets can be broadly classified into a few categories based on their use cases. Here are five of the largest categories, which overlap each other to some extent.
- Utility Tokens: Utility tokens are tokens that allow holders to perform actions within an ecosystem. One example of a utility token is the Basic Attention Token (BAT), which is designed to be paid out to users of Brave Browser in exchange for their exposure to opt-in advertisements. BAT also offers users the ability to tip content creators within the ecosystem.
- Governance Tokens: Governance tokens are utility tokens that provide holders with the ability to vote on various proposals within a blockchain ecosystem. This system of on-chain governance using tokens allows users with a vested interest to collaborate in bettering an ecosystem in both a tokenomic and technological sense by allowing their voices to be heard. Governance tokens can also be staked with on-chain entities, in which case stakers receive returns while delegating their voting power to others that are more knowledgeable of the ecosystem. Examples of governance tokens include the ENS token associated with the Ethereum Name Service project and the UNI token associated with the Uniswap protocol, a DEX.
- DAO Tokens: Decentralized autonomous organizations (DAOs) are decentralized communities defined by smart contracts and governed entirely by its members to achieve a set of goals, usually in relation to a cause or a DeFi protocol. DAOs often raise capital by issuing governance tokens to raise treasury funds. Once a DAO is deployed, on-chain governance becomes the only method of making decisions, providing these tokens with an inherent value. For instance, the ConstitutionDAO sought to purchase a copy of the U.S. Constitution at auction, coming exceedingly close to doing so. Another example of a tokenized DAO is the PleasrDAO, which seeks to create a communal collection of NFT art.
- Security Tokens: Security tokens are a class of tokens that give holders rights of ownership to a company, much like traditional stocks, albeit done using the blockchain. Security tokens grant ownership of the company rather than governance or any other utility. Security tokens offer a precursor to the traditional IPO structure or an ability for entities like investment trusts to delegate ownership across assets.
- NFTs: NFTs are unique utility tokens that are differentiated from others in the same collection in the eyes of a market, much like trading cards. As per the definition of fungibility, one NFT cannot be replaced by another. In some cases, this differentiation comes from unique serial numbers or other differing attributes which are valued subjectively. Much of the past year’s buzz regarding NFTs has come from the NFT art space, where pieces from various collections of art (some notable collections include the Bored Ape Yacht Club and CryptoPunks) have exchanged high profile hands at incredibly high prices.
This being said, the NFT space at large goes beyond visual art, with potential applications being event tickets, domain registrations, independent music or contracts.
Where to Buy Digital Assets
You can choose from a few major methods for purchasing digital assets with varying levels of adjacency to the off-chain world. The closest of these methods is the use of a centralized exchange (CEX). CEXs are large companies that charge a small fee to exchange digital and fiat assets in both directions. Major CEXs include Gemini and eToro, and both have a wide range of established tokens that can be purchased using fiat currencies or by using cryptocurrencies.
Next is the use of a decentralized exchange (DEX). A DEX does exactly what a CEX does through the use of community-funded liquidity pools and with greater wallet integration and more limited fiat options.
The final way to acquire digital assets is through a mechanism called an airdrop. Airdrops reward holders or stakers of tokens by granting them access to the tokens of upcoming projects for a network fee. These highly unpredictable actions are designed to rapidly build communities for new projects and ideas.
Cryptocurrency is offered by eToro USA LLC (“the MSB”) (NMLS: 1769299) and is not FDIC or SIPC insured. Investing involves risk
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more
How to Buy NFTs
Purchasing NFTs is a little bit different to other types of digital assets in the sense that there’s a distinct market separate from fungible cryptocurrencies.
The secondary NFT markets act like a typical auction market, where OpenSea (and more recently LooksRare) act as middlemen to facilitate timed auctions for NFTs. The same goes for other NFT ecosystems on different blockchain platforms. These platforms use smart contracts to automate transactions, and users can choose whether to list NFTs on auction or for sale at a set price.
Keep Your Digital Assets Secure
Individuals typically use tools called wallets in order to securely store their digital assets. These wallets are associated with a unique address that blockchain transactions are sent to and from. Two major types of wallets — hot wallets and cold wallets — exist. In general, it is unwise to store large amounts of tokens in a wallet that you don’t control, such as that of a CEX.
Hot wallets are software wallets that are constantly connected to the internet, allowing seamless and convenient exchanges when browsing the internet. The downside to this connectivity is the potential of falling victim to phishing scams or other attacks from malicious sites. Treat your seed phrase like your credit card information; never give your seed phrase to any person or site.
Some examples of hot wallets for the Ethereum network include MetaMask and Tally, both of which offer browser extensions for major browsers. Some browsers like Opera and Brave are currently building native hot wallets, which is another place to look.
Cold wallets are hardware wallets that are connected to the internet only when they are powered on, essentially trading convenience for security while still performing the same core function. Ledger makes thumb-drive-sized cold wallets that offer a high degree of compatibility and security.
Ideally, hot and cold wallets are complementary in a similar sense to multiple bank accounts, where valuable quantities of tokens being indefinitely held should be stored in a cold wallet, while smaller quantities of tokens intended to be liquid should be stored in a hot wallet.
Is Investing in Digital Assets Worth it?
In the digital assets space, there’s a lot of speculation and volatility, so don’t invest money or crypto that you’re not willing to lose. Learning and researching as much as possible about what you want to invest in is the best way to navigate the speculation and to stay safe within any class of digital assets.
At the same time, it seems as though institutional investors have begun embracing digital assets as a legitimate asset class over the past two years, which diminishes the present uncertainty to some extent. Risk and reward also drastically differ based on the types of digital assets being purchased, with NFTs being among the most speculative and staking governance tokens with a validator being a relatively low-risk strategy.
Because of these clear separations, it’s fairly easy to stay within your risk tolerance in the space, even if it means being a spectator to explosive price surges. As with most other forms of investment, diversification in all senses is important and a way to gradually gain exposure to some of the more exciting and innovative parts of the digital assets space.
- Exclusive Crypto Airdrops
- Altcoin of the Week
- Insider Interviews
- News & Show Highlights
- Completely FREE
About Aadharsh Pannirselvam
Aadharsh Pannirselvam is a student at the University of Chicago studying Economics and Data Science while building with Blockchain Chicago and the Chicago DAO. Aadharsh works on creating easily digestible web3 and DeFi content at Benzinga while learning off of the bleeding edges of blockchains and digital assets and exploring a career in the space. He holds positions in Ethereum, Bitcoin, and various other DeFi protocols and ecosystems. Aadharsh was previously affiliated with Flipside Crypto and is currently affiliated with Galaxy Digital. Aadharsh’s opinions are his own and not financial advice. The best way to get in touch with Aadharsh is via Twitter, @aadharsh2010 or via LinkedIn.