What to consider when buying asset-backed tokens

Blockchain technology has brought a lot of benefits as well as risks to the digital and real world markets. Asset-backed token, which acts like a bridge to connect real world asset and blockchain network, is one the most important and exciting products of blockchain technology.

There are many benefits associated with asset-backed tokens or tokenized tangible assets that has made it very interesting for investors these days.

However, despite the benefits and value that blockchain creates for investors, some serious risks are associated with investing in tokenized assets. As such, you must be very careful and have a full understanding on how to make a secure investment in blockchain, in order to protect your investment.

Essentials to consider with care, when buying an asset-backed token

1- Underlying Asset verification

The first step, when making an investment decision, is to fully understand what you are investing in. In our case, the token doesn’t have a value by itself. The token value comes from the underlying asset that is converted to the token. As such, you must verify the underlying asset to exist at all and audit the fair value of the underlying asset. Besides, you must make sure about the integrity of the underlying asset and the token you are purchasing.

2- Custodial Services

The second step of your journey must be making sure about how secure and safe the underlying asset is stored and maintained. For instance, if you are buying a diamond-backed token, you must ask questions about where the actual diamond is stored, how secure the storage is and whether it is insured by a reputable insurance firm.

3- Real time value

The value of the token is supposed to reflect the real market value of the underlying asset. In the real world, the value of all assets depreciates and appreciates, or in other words fluctuates. You must make sure that the fluctuations in price of the underlying asset are reflected in the token value in real time. There are powerful oracle tools like Chainlink that provide the real time data to smart contracts, so they update the token price instantly according to the asset market value.

4- Legal and Compliance

The process of purchasing the underlying asset and tokenization must be fully in compliance with the local law, where the asset is purchased and tokenization happens as well as the international law, if the asset is stored in a different country. It is quite important to make sure about the legal and compliance, in order to safeguard yourself and your investment.

5- Liquidity of the underlying asset

One of the major risks associated with all types of investment is the liquidity risk. As an example for your better understanding, the real estate sector, despite all benefits it has as an investment method, is considered as an illiquid market due to many reasons. Even though the blockchain, in general, enhances the liquidity by providing a 24/7 market to trade in, there are still assets that are illiquid in nature. As such, it is crucial to ensure the liquidity of the underlying asset when buying its token.

What type of asset-backed tokens has lower risk?

This article is not going to recommend the readers to invest in any type of asset-backed tokens. However, for your knowledge and information, we would like to discuss the characteristics of asset-backed tokens that have low risks.

In addition to the essentials that we have gone through earlier in this article that you must comply with carefully, tangible assets with low volatility in price and lower probability of deterioration would be a good option to invest on. Likewise, it is reasonably safe to invest in real estate tokens, if the token meets all the minimum requirements as detailed in this article. Other benefits with investing in tokenized properties is that it makes you entitled to receive the rental income generated by renting out the underlying property. That is how to make a secure passive income from your investment.

Bottomline

As an investor, you must make yourself familiar with the sector and its characteristics, before making any investment. This is the same thing for investment in blockchain, however, it needs even more care, as the industry is quite new and volatile. Asset-backed tokens are generally safe to invest in, if you comply with the regulations and do your research carefully about the underlying asset and its integrated tokens. 

Here in this article, we tried our best to discuss the main factors to consider when making investment in asset-backed tokens. However, you must be very vigilant, as the blockchain market is a perfect place for scammers and cyber criminals. 

At last, we would like to highly recommend consulting with professional and reputable firms in blockchain, before making any investment decision.