4 Examples of Digital Assets: October Webinar Wrap

Estimated reading time: 6 minutes

When any asset increases in value by over 100,000% in a few years, it’s going to create headlines. When that same asset plummets nearly 70% from its peak, it’s going to be one of the talking points of the decade.

And given that Bitcoin is allowed in a self-directed IRA (SDIRA), many IRA holders are wondering, “Does it deserve a spot in my portfolio?”

In our October webinar, we delved into the world of crypto and digital investments with the guidance of two experts in the field, Cory Rodriguez and Judd Kitzmiller. Cory is the partner and Chief Operating Officer of NF&8 Group, while Judd is the VP of Revenue with 10 years of experience in the alternative investment and cryptocurrency sectors.

In this article, we’re bringing you the key takeaways from Judd and Cory’s presentation. This includes insights on how the blockchain enables digital investments, four popular examples of digital assets, and how digital investment holders may be able to manage risk and volatility.

Want more in-depth information on a specific section of the blog post? Simply click on the section heading (for example: “What is a Digital Asset?”) to jump right to that portion of the webinar.

What is a Digital Asset?

Judd began the presentation by defining terms. In his view, digital assets are representations of value that exist in electronic form. These can range from cryptocurrencies like Bitcoin and Ethereum to digital tokens representing ownership of real-world assets such as real estate.

Digital assets stand out due to their utilization of cryptographic techniques and blockchain technology. Together, these innovations significantly enhance the security, transparency, and immutability of digital transactions.

How the Blockchain Enables Digital Asset Investment

Blockchain technology plays a crucial role in enabling digital assets to exist by providing a secure and transparent platform for their creation, management, and transfer.

In essence, the blockchain is a decentralized and secure technology that records data on a distributed ledger. It operates across a network of computers, known as nodes, eliminating the need for central control. Transactions are grouped into blocks, forming a chronological chain, hence the term, "blockchain."

This technology increases transparency, as all participants can view and verify transactions independently. Once data is recorded, it becomes virtually immutable due to advanced cryptographic techniques. Consensus mechanisms like Proof of Work or Proof of Stake ensure that only legitimate transactions are added to the ledger.

In addition to cryptocurrencies, blockchain technology has carved a niche in various sectors such as supply chain management, identity verification, and smart contracts. These applications offer the potential to enhance security, transparency, and trust across a wide range of industries.

4 Examples of Digital Assets

In his presentation, Judd highlighted the four primary types of digital assets:

Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that use cryptographic security and operate on decentralized networks. Bitcoin and Ethereum are well-known examples. 

These assets often have low correlations with traditional assets like stocks and bonds, which can help spread risk. Some investors view cryptocurrencies, especially Bitcoin, as a store of value and a hedge against inflation, similar to gold.

A stablecoin is a type of cryptocurrency designed to maintain a stable value, typically by pegging its price to a reserve of assets or by algorithmic mechanisms. Stablecoins act as a vital link between conventional financial systems and the realm of cryptocurrencies. They provide a dependable and less volatile means of exchange, a secure store of value, and a consistent unit of account.

Some economists have noted that stablecoins are often viewed as a viable currency alternative for citizens of countries that regularly experience hyperinflation. By mimicking the performance of a fiat currency such as the US dollar, stablecoins may allow those in developing countries to transact with a more stable currency than their nation’s monetary system.

Tokens and Smart Contracts

Tokens represent various assets, both digital and physical, and can be used to create programmable agreements known as smart contracts on blockchain platforms. But how do crypto tokens differ from cryptocurrencies?

Cryptocurrencies are designed for general use as a medium of exchange and store of value, while crypto tokens are digital assets that represent ownership, utility, or other functions within a blockchain ecosystem. Tokens are versatile and customizable, making them suitable for a wide range of applications beyond simply being a form of currency.

Crypto tokens have diverse use cases, including powering decentralized applications (DApps), enabling smart contracts, and facilitating crowdfunding through Initial Coin Offerings (ICOs) or Security Token Offerings (STOs). Ethereum's ERC-20 tokens are among the most well-known tokens, used for various purposes such as trading, accessing DApps, and more.

On the other hand, smart contracts are the backbone of many crypto tokens, governing their creation, behavior, and management. They provide the automation and trust required for token-based ecosystems, making them a fundamental component of blockchain technology.

Non-Fungible Tokens (NFTs)

NFTs represent unique digital assets, such as digital art, collectibles, or virtual real estate, and have gained significant attention in recent years. 

Keep in mind that the IRS prohibits investing in collectibles with your IRA funds, including those that may be held on NFTs. This is specified in IRS Notice 2023-27.

Security Tokens

While NFTs represent ownership of digital assets such as virtual trading cards or digital art, security tokens represent ownership in real-world assets like real estate, stocks, or commodities. 

Factors Determining the Value of Digital Assets

In this webinar, Judd highlighted that digital assets are affected by many of the same market factors that affect physical assets, such as scarcity, utility, and widespread adoption.

Scarcity and Supply

Cryptocurrencies like Bitcoin are inherently deflationary due to their predetermined supply limits. The finite supply not only imparts a sense of rarity but also fosters a perception of long-term value growth as supply grows more scarce.

Utility and Use Cases

Judd further elaborated that assets with practical use cases tend to have more intrinsic value. Tokens enabling access to decentralized applications or services gain value based on their utility within those ecosystems.

Network Effect and Adoption

The network effect, where the value of a product or service increases as more people use it, applies to digital assets as well. A growing user base drives demand and increases the value of associated assets.

Managing Risk and Market Volatility

The digital asset market is known for its volatility, characterized by rapid and unpredictable price fluctuations. Various factors may impact digital asset volatility, including unforeseen regulatory developments, technological advancements, market sentiment, and macroeconomic trends. Understanding the nature of these developments is essential for the ordinary investor.

If you invest in these assets with your IRA funds, be aware that if the reward potential is greater, the risk potential may be greater as well. Conduct thorough due diligence on any opportunity before you invest to make sure you fully understand the risks involved. This includes investigating the broker and the digital asset itself.

Research the offering firm’s history, track record, investor reviews, and whether they’re registered with the SEC. Under the Securities Exchange Act of 1934, every offer of securities must be registered with the SEC. However, there is currently some debate within the financial and judicial systems as to whether digital assets fall under the umbrella of securities. 

The situation is developing rapidly. In 2022, the White House unveiled a framework for the responsible development of digital assets, addressing risks and potential benefits. It focuses on protecting consumers from fraud, promoting affordable financial services, ensuring financial stability, fostering innovation, and fighting illicit finance. 

For instance, the SEC recently charged Coinbase, one of the largest crypto trading platforms, as an unregistered securities exchange, broker, and clearing agency. 

It may be wise to diversify your digital assets investments over multiple forms. By spreading risk, you may decrease your potential earning ceiling, but you decrease your potential loss as well.

Maintain the Tax-Preferred Status of Your IRA

To maintain the tax-advantaged status of your IRA, you must adhere to the investment regulations enforced by the IRS. 

This includes avoiding restricted investments such as artwork (including digital), life insurance, or shares in an S-corp. Additionally, do not engage in transactions with any disqualified persons, such as a spouse, parent, child, or even yourself.

Ready to learn the ropes? Dive into our SDIRA Rules Guide

Explore What Digital Assets Can Do For Your Portfolio

Our October webinar served as a comprehensive introduction to the exciting world of digital assets, blockchain technology, and the myriad opportunities and challenges they present to investors. 

Once IRA holders know the risks involved, they can explore digital assets for their retirement portfolios and determine whether they make a good fit for their SDIRA. 

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Plus, we’ll keep you informed about each upcoming webinar as it approaches. Every month, we invite industry experts to dive deep into topics like Resort Real Estate Investing, Investing With IRA LLCs, and the World of Cryptocurrency Investing.