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Tokenized stocks
Quick definition
Copy link to sectionTokenized stocks are digital assets tied to the value of a share.
Key details
Copy link to section- Tokenized stocks are a way of owning shares in traditional companies using digital currencies
- Tokenized stocks can be bought and sold with cryptocurrency
- The stocks mimic the performance of the underlying asset in the real world
What are tokenized stocks?
Copy link to sectionTokenized stocks are a way of buying stocks that represent the value of a company using cryptocurrency that can be bought on a cryptocurrency exchange.
When you buy a tokenized stock, you get a digital asset on the blockchain that represents a share. Instead of the share itself, you receive a token into your cryptocurrency wallet that’s tied to the share’s value.
Tokenized stocks mimic the stock market in many ways. Tokenized stocks can be bundled together much like exchange-traded funds (ETFs), so you can buy tokenised bundles of tech stocks, for example.
Another way to use tokenized stocks is to buy ones linked to the value of an index. You can find tokens that track the performance of markets like the S&P500 or the Dow Jones Industrial Average.
There are other crypto assets that work in a similar way, such as stablecoins, which are tokens linked to the price of a fiat currency (like USD, GBP, or EUR). These can be traded in the same way as tokenized stocks.
What are the benefits of tokenized stocks?
Copy link to sectionTokenized stocks remove the restrictions of regular stock trading.
When you trade regular stocks, you’re dealing with a broker or a middleman that ultimately controls how and when you can trade. Tokenized stocks are completely decentralised, so there are virtually no restrictions and you trade directly with the person on the opposite side of the trade.
Here are some of the immediate benefits of trading tokenized stocks:
- 24/7 trading, you don’t need to stick to regular market opening hours
- Lower transaction fees as there are fewer intermediaries taking a cut
- Greater transparency with all transactions visible on the blockchain
- No regional restrictions on which stocks you can trade
- You can buy fractions of shares, trade as much or as little as you want
As well as these basic benefits, there’s no way your broker can unilaterally stop you from trading. We have seen brokers like Robinhood and Trading212 do this during periods of ‘high volatility’, but when trading tokenized stocks there is no chance of that happening.
What are the risks of tokenized stocks?
Copy link to sectionThere is very little regulation of tokenized stocks, you’re on your own.
Many of the things that are beneficial when you buy tokenized stocks also introduce a lot more risk into the bargain. Its decentralised nature means cryptocurrency and the blockchain has much less regulation than any other industry.
It’s worth remembering that when you buy a tokenized stock that’s tied to the value of an asset, you don’t actually own that asset. You won’t get any protection if the company goes bankrupt and you won’t have a vote in the company as you would with a regular share. Usually, your broker will pay out dividends, but that isn’t guaranteed and you should check the terms and conditions before signing up.
The other big risk is a lack of liquidity. As in regular markets, you need a buyer and a seller for every trade. For the top players in the stock market, there is almost always a high volume which means you can sell whenever you want. Tokenized assets can see less liquidity, which might make it hard to find a buyer for your tokens.