How can security tokens help survive cryptowinter
Since November 2021, Bitcoin and other cryptocurrencies fell historically low, losing over 3 times in value. It’s probably clear that a landslide as significant as this never comes singly – not because of a Murphy law but rather because of being just one of many outcomes caused by a domino effect. One of the premises of today’s crypto winter is The US Federal Reserve’s monetary tightening, which, in turn, is an attempt to fight inflation and likely interest rate hikes.
According to Euromonitor’s global inflation tracking report, average annual global inflation from the beginning of the Millennium and up to 2019 constituted 3.8%. In Q2 2022, due to Russia’s invasion of Ukraine, it hiked 7.9%.
Naturally, a vulnerability like this makes investors and businesses question cryptocurrencies’ potential as an inflation hedge, as well as generally affects their sentiments. It seems like what was considered a modern means of effective investing is failing its promise, and blockchain doesn’t really have a tangible safety harbor to offer. With that said, the main struggle of investors and businesses worldwide is to find that harbor.
Such a safe harbor exists: surprisingly, you don’t even have to go off-blockchain. We are talking about security tokens.
Why are traditional asset classes are now underperforming?
Before we describe security tokens’ advantages, let’s see why other asset classes are not fulfilling their promise right now.
For instance, one normally safe asset class is corporate bonds. They are frequently invested in, which is in a precarious position. Federal Reserve bought out an enormous amount of corporate bonds, which consequently made this market unsustainable. As the money printing is slowing down and the interest rates are growing, most likely, many companies won’t be able to pay those out and announce default.
Nearly for the same reason, public equities perform poorly too and will continue falling. Firstly, the whole public market was overheated over the last couple of years, leading to valuation multiples that are too high. It was easy to invest in, which was Federal Reserve’s main tactic after money was printed, which made companies’ evaluations blown out and unrealistic and thus fragile. Because of this, while the market is turning back to its normal state, their multiples will consequently fall. Additionally, companies’ revenues are falling too due to inflation and reduction in consumer purchasing power. The markets will most likely continue falling after the publication of quarterly earnings reports, and taking growing interest rates into account, the situation will continue worsening for at least one more year.
Corporate bonds and public equity go hand-in-hand in this case, as corporate defaults will lessen the stock price, while the company’s bad performance increases the probability of default.
Lastly, investing in crypto is not the best idea at the moment too: while we disagree that “crypto is worthless because it isn’t backed by actual cash flows or assets,” its value derives from the utility of using these currencies in Web3 solutions and ecosystems. However, Web3 has been mostly focused on financial applications, so as the intensity of trading and speculation plummets, so does the value of typical crypto tokens. Moreover, many tokens had unstable financial models that had zero resilience to bear markets. Their failure further contributed to a general decline.
All in all, one might need a better investment strategy that could somehow include the best of both worlds. Enter security tokens.
What are security tokens, and what is their investing potential?
Security tokens are basically regular securities transferred to the blockchain. They barely have anything in common with crypto tokens (as they are not a payment method). Still, they preserve their advantageous qualities like being easy to use (frankly, like any other asset on the blockchain). Although cryptomarket is experiencing a severe depression today, security tokens stand still in the face of crypto winter’s blizzards. Thanks to being backed by tangible assets they represent and not being overheated like public equity, they currently are the best investment that could hedge against inflation and preserve your savings ― as a matter of fact, not only now but in a very, very long-term perspective. The same goes for businesses looking for fundraising: they can greatly benefit from a solution like STO (security token offering) too, but we’ll focus on that later.
Cryptocurrency is a very volatile and thus risky investment. In good times like quantitative easing, it is growing more rapidly, falling in price just as painfully and unexpectedly at any moment later. If you choose an asset not as much as an investment but rather as a means to preserve money, whether it’s a retirement vault or any other savings, it’s worth thinking about safer assets. The financial advisors, including professionals like Nassim Taleb, who forecasted the 2007-2008 recession, recommend apportioning 90% of your investing budget to safe assets and giving 10% to risky investments.
Analogously, the assets outside the cryptomarket are also bad for long-term investments. Real estate objects or private companies’ shares are illiquid outside of blockchain because it’s complicated to make an exit. Even the traditional stock market is volatile, cryptocurrency-correlated, and doesn’t protect its investor properly. Moreover, it’s impossible to use cryptocurrency while investing in traditional finance; it’s also less transparent and less encrypted, so there’s barely any value in investing in that too.
The solution standing solid is security tokens. Much like it works in genetics, they turn out a fortunate half-blood of crypto (transparency, technological efficiency, highly liquid) and traditional stock options (backed by actual business stock or cash flows). Thanks to the latter, they keep afloat even when the crypto market is down. This is why security tokens are the main shield protecting you from the villainous landslide the crypto market is experiencing once in a while. While cryptocurrency is not backed by anything but PoW, security tokens remain a solid asset that survives market fluctuations and remains in use. All thanks to being backed by tangible assets: people will keep on living, buying or selling real estate, or develop their business (securities), just like a rare diamond or painting will appreciate too (yes, you can tokenize that).
Provided that there’s not only a credit cycle crisis but also supply chain disruption, the assets in question will appreciate even more as they become more scarce. While the virtual world’s assets will fall in price, real-world assets appreciate. This is why such an investment is a good way not just to secure your money but also to multiply it and hedge against inflation.
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Security tokens and STO as the means of raising capital for business
Since its dawn in 2017, the security token market has given birth to a vast myriad of different successful STOs in absolutely various industries. For instance, the World Bank issued Bond-i (blockchain-operated new debt instrument), the world’s first bond to be formed, allocated, transferred, and handled using distributed ledger technology during its life cycle. The two-year bond raised A$110 million, making it the first time investors have contributed to the World Bank’s growth efforts in a deal entirely controlled by blockchain technology. Or St. Regis Aspen Resort’s success in their tokenized real estate offering Aspen Digital. A luxury hotel in the Rocky Mountains raised $18M by tokenizing the building and offering investors to purchase a tiny fraction.
Security token offering is just what the doctor ordered for businesses seeking to increase the liquidity of their assets or raise funds. In simple words, a security token offering is a decentralized finance doppelganger of an initial public offering. The problem with the latest is that it’s extremely expensive, costing up to several million. Besides, such a venture is not necessarily successful for the company and can sometimes lead to bankruptcy. Security token offering, on the other hand, is significantly cheaper, starting budget is around $100K. Its main beauty is that you don’t have to go public; the company can remain entirely private.
If tokenized, the securities (which are now security tokens) can be easily managed with the help of appropriate user-friendly software like Stobox Digital Securities Dashboard, a platform streamlining all operations with tokenized securities. Thanks to DeFi protocols like AMM (Automated Market-Making), tokenized securities can be traded a lot faster and easier than traditional securities. This process, necessitating broker-dealers and other intermediaries in the realm of traditional finance, is conducted fully automatically if securities are tokenized.
One more thing tokenization offers is access to a broader range of investors and thus collecting more funds. The main targeted investor audiences can be crypto investors (who want to diversify their portfolio and get more protection than with conventional crypto assets), millennial investors (looking for alternative assets to protect themselves from stock market volatility or get better returns), and family offices or HNWI (need a better investment experience, more liquidity, and access to great assets).
It’s times when the general amount of capital is reducing, companies’ evaluations are falling, and accelerators like Y Combinator or funds like Sequoia are sending their startups a memo informing raising money from now on will be even more challenging, and there gotta be some cuts. With that situation in the market, having companies’ assets preserved in a safe asset is a guarantee that, in the worst-case scenario, money will not be lost. The best case, of course, suggests raising the hard cap and multiplying your business evaluation several times.
How exactly can you conduct tokenization?
Tokenizing is like renovating your house: you can obviously choose to do it yourself, but trusting a qualified company will certainly take a load off your shoulders. This is where Stobox comes in. Our company is an award-winning turn-key tokenization provider that takes clients through all the process stages and stays with them until the offering is over. Besides, Stobox developed a range of unique products like DS Dashboard, a solution to manage tokenized securities, or DS Swap, which is basically Uniswap for tokenized securities.
Tokenization is a relatively new technology that only a handful of businesses have adopted, so those who utilize it today significantly stand out from the crowd. At some point, however, this technological solution will cease to be a rarity and become the new standard, just like having a website is now. While completing tokenization gives an enterprise an advantage, it will be necessary to stay up with the competition and not fall behind in the future. Soon, the competition for investors among tokenized businesses will grow, which respectively will mean the liquidity isn’t such a big deal anymore (because every business is liquid), and creating the investor’s community will be more challenging as well.
Of course, big Wall Street investors are well-aware of where to put their savings next. They have made timely exits and have a (not so complicated) task to reinvest the capital. It gives a tangible hope that the tokenization sector will soon have more significant investments so that the industry will grow in value every day.
So tokenize. Stobox is right here to provide you with a complimentary 30-minute consultation.