Digital assets vs. Physical assets: what's the difference?

We hear about digital assets every day. Indeed, this industry is actively developing. In addition to cryptocurrencies, we also observe the development of other types of digital assets. For example, we are talking about non-fungible tokens (NFTs), managed cryptocurrency funds, security tokens, etc.

However, the active development of the digital asset industry has not led to a decrease in the value of physical assets. People also actively invest in currencies, precious metals, and property. In some countries, there is a special demand for gold as it symbolizes status. Investors in Australia prefer to invest in real estate and so on.

A key aspect of any investment is risk diversification. Therefore, it is not recommended to invest only in real estate, only in stocks, or only in gold. A wide range of investment instruments allows diversifying risks. However, if you plan to hold both physical and digital assets in your portfolio, it is important to understand the differences between digital assets vs physical assets.

Digital assets

Digital assets are intangible, but they can also provide ownership of an asset. Digital asset examples include JPEG images, PDF files, videos, cryptocurrencies, tokens, etc.

Benefits

• Low costs. As a rule, the commission for buying or selling digital assets from brokers and exchanges is lower compared to physical assets such as real estate or stocks.
• Liquidity. There is always a demand for digital value, so you can sell them at the right time without any problems.
• Fractional ownership. You don't have to buy a whole luxury resort. You can buy a share of it (a token) and earn on it, replenishing your portfolio gradually.

Related: How can digital assets work to your advantage? Top-3 use cases

Drawbacks

• Fear of missing out (FOMO). Often people trade digital assets guided only by emotions and not by logic or analysis, as such assets are very easy to buy & sell. Often this leads to financial losses.
• Safety. Digital assets have certain security issues. Wallets and vaults can be hacked, and you can lose your assets. There are known cases of the theft of large amounts of cryptocurrencies after hacking crypto exchanges.

Physical assets

Physical assets include real estate, stocks, precious metals, and currencies that you own physically, as well as luxury goods. It is a fact of owning them that gives people a sense of security since these objects are really material – they can be seen and touched.

Benefits

• Acceptability. These assets are used for investments worldwide, so they can be sold anywhere.
• Possibility of real use. You can use the physical currency in another country, move into an apartment you've bought for investment (if there is such a need), or wear gold jewelry.

Drawbacks

• High entry threshold. For example, to buy real estate, you need to save for many years or pay off a loan. In addition, a down payment of up to 25% of the cost is required to obtain a loan. This makes the physical asset expensive to purchase.
• Low liquidity. Only cash is really liquid among all physical assets. Selling gold or real estate takes a lot of time. In addition, you can not sell a part of the physical asset.

What is the difference between protecting digital assets and physical assets?

Another important difference between digital assets vs physical assets is how they are protected. The key differences are as follows:

Various focuses

Digital assets are primarily focused on external factors. The main threat to them is hacking and theft of assets. Of course, it is also possible to hack databases from the inside, but first of all, the security of such assets requires protecting digital assets against external threats. It is not uncommon to outsource this functionality to third-party security providers.

As for physical assets, first of all, they need to be protected from internal issues. Of course, there are also external threats, such as the theft of gold or cash by attackers who are unrelated to the company, but more often than not, their own employees try to steal them. Therefore, the protection of such assets consists in controlling physical access to these assets, including for employees of your organization, providing access only in some instances.

Different losses

The loss of a digital asset means the loss of data for the company and, accordingly, the loss of intellectual property. The loss of a physical asset means the loss of physical property. The key difference between digital assets vs physical assets is that it is relatively easy to replace a physical asset, even if the replacement is expensive. Replacing a digital asset is much more difficult and completely impossible in some cases (for example, this applies to NFTs, which are absolutely unique by their nature). Thus, protecting digital assets is a must for any holder.

Various vulnerabilities

Digital and physical assets are vulnerable in different ways. The problem of digital asset vulnerabilities lies in various forms of attack. It is very difficult to notice any signs of a vulnerability that could lead to an attack. Physical assets are more vulnerable to "visible" factors such as physical theft or unauthorized use of property or equipment.

The biggest threat to physical assets is that they can be compromised due to breakage or theft. As for digital assets, they can be compromised in other ways, such as:

• Data loss.
• Compromised accounts.
• Phishing.
• Malicious software.
• Unsecured IoT devices.
• Cloud storage vulnerabilities.
• DDoS attacks.
• Hacking APIs, etc.

Various protection methods

There are many ways to compromise digital value. This makes protecting digital assets quite tricky and requires high financial costs. However, not all systems are the same. Different assets require different degrees of protection. Some are better protected from possible attacks by default; some are worse. According to McKinsey, it is vital that company management provides control over the search for vulnerabilities and regularly requests security analysis reports.

When it comes to physical assets, access control is a meaningful way to protect them. Only specific categories of employees should gain access to them and only for a particular reason. For example, authorization and multiple identity checks can be applied. Developing special software to control and manage enterprise assets is also possible.

Summary

Diversification is the key to successful investments. Today, people and companies can invest in both digital and physical assets. However, it is crucial to understand the difference between them. A fundamentally different approach to security is required since digital and physical investment assets have their own specifics. It is important to ensure constant monitoring and develop a system of protection, considering the risks for a particular asset. Stobox has extensive experience in working with digital assets and is ready to help you issue your own digital assets of the required type or invest in such assets safely. Contact us to get more information during the first free consultation.