Tokenization - The Changing Face of Finance

With the invention of the blockchain 16 years ago, entirely new industries are now springing to life. The first application of the blockchain was cryptocurrencies, now a multi-trillion dollar market. The next and potentially much larger phase of blockchain applications will be "Tokenization". Tokenization is changing finance as we know it, and faster than anyone could imagine.

Just like mutual funds and ETFs (Exchange Traded Funds) changed the way many of us purchase stock ownership, tokenization will dramatically change the way we all own things. In fact, we won't own "things". Instead, we will own tokens representing the things, either entirely or in part.

When you think about a mutual fund, a share of the fund is essentially a "token". That share represents a claim on a portion of the earnings of the stock held by the mutual fund. You don't directly own the stock, but as a small investor, you can benefit from stock-ownership by owning the mutual fund shares.

A few years ago, non-fungible tokens built on blockchain technology were popular, and still are. Let's say for example you have a $20 million Rembrandt painting. There are relatively few people in this world who have $20 million to buy that painting from you. But if the ownership of the painting was tokenized, with 100,000 tokens, each worth $200, anyone could afford to buy a few tokens of the Rembrandt painting....and thereby own the benefits of a famous Rembrandt artwork. The artwork itself remains with a custodian who protects it.

With the blockchain, the entire record of ownership is public and unquestioned, unlike securities and titles kept either privately or in a government office.

Now, instead of financial assets or expensive Rembrandt paintings, imagine having the same arrangement with all real-world assets (RWAs), such as homes, cars, clothing, commercial buildings, furniture, computers, or basically ANYTHING!

Let's say you want to monetize your car, and it is worth $25,000 now and expected to depreciate to $8000 10 years from now. A smart contract can be encoded into tokens issued by a custodian of the car. You sell your car to the custodian, who in turn offers ownership tokens for the public to buy. You agree to rent the car back from the custodian for a monthly fee that covers the depreciation and provides a bit of a profit to the token holders. At the end of five years, you agree to either repurchase the car for its residual value, or have the custodian sell it. At that point, the tokens expire and final amounts, per the contract, are settled.

In this example, maybe there are 1000 people buying tokens at $25/token, such that 1000 people effectively bought your car who then profit from your use of it over time. You in turn get $25,000 put in your pocket right now, where you might earn more on that $25,000 than you are paying the custodian for using the car., perhaps buying other tokens yourself on someone else's assets.

This is a common practice in the securities industry today, but usually only the rich play it with expensive assets. Managing the process is cumbersome with old paper-based technology. With the introduction of the blockchain, this financialization of every asset, and the opening it up to the masses, will create incredible efficiency in the financial system, becoming substantially less costly.

Cryptocurrencies known as "stablecoins" are essentially tokenized dollars. Circle Internet Group (CRCL) created the USDC coin years ago, and it is a token that represents one US Dollar (a real world financial asset). They also created the EURC (Eurocoin) where one token represents a Euro.

When we think about tokenizing physical or financial assets, debt, derivatives, options contracts, futures contracts, and basically anything with value, that represents a $300 trillion market in the U.S. alone!

Blackrock, the large financial investment firm, expects to tokenize nearly all of their $10 trillion asset portfolio under management (BlackRock's $10 Trillion Tokenization Vision: The Future Of Real World Assets).

A few years ago, they launched the IBIT ETF, which purchases Bitcoin, and now owns over 700,000 of the 21 million Bitcoins to ever be created. Once Blackrock acquires enough coins in the ETF, it is highly likely they will tokenize these coins into many millions of tokens, where you could purchase a token representing a small part of a Bitcoin.

I am not sure how this will pan out, since you can already purchase a small fraction of a Bitcoin. But if those tokens happen to be stablecoins exchanged like money, that represents a real game changer in the financial system. Every asset in existence essentially becomes a form of money.

All assets, and all types of assets, can essentially be monetized, creating liquidity and efficiencies in the financial system never seen previously.

So do I want to buy the tokens, or cryptocurrencies such as Bitcoin? I could, and I do, and I expect to make a ton of money on those.

But why would I want to invest in those parties engaged in the financial wars about to unfold, betting on which crypto will win in the financial wars? Wouldn't it make better sense to invest in those who create the weapons in the financial battle, selling those weapons to all sides? Wouldn't it make better sense to invest in those who create the tokenization platforms?

For these reasons, I really like companies such as Circle Internet Group (CRCL), Coinbase (COIN), or even RIOT Platforms (RIOT) based locally near me in Colorado, although RIOT is much smaller. Right now, I see these companies as the leaders in supplying the weapons of an unprecedented financial war.

One thing is for certain. With the blockchain invented just 16 years ago, it is only now beginning to be utilized in ways barely imagined when invented. The products it spawns are NOT going away, and will be integrated into all of our lives.

Just like the first color TV was invented in 1926, it wasn't until the 1950s that television became popular, and not until the 1970s that the color TV became a standard household fixture, and all Japan's electronics manufacturers minted profits like no tomorrow. A 44-year technology adoption cycle.

Similarly, the first modern cell phone was introduced in 1973. Within 10-years by the 1980s, the wealthy all owned one as novelties and for business. By the 1990s, we all started owning them. The technology adoption cycle shrank to less than 20 years.

Technology adoption is even faster today, and other than artificial intelligence, there is no industry as great at changing our monetary lives than those being spawned from the invention of the blockchain. We are at the point in the blockchain technology adoption cycle where the greatest profits are generated with the least risk.

One word of caution should you invest in stocks like those I mention above. While I believe they will rise dramatically over time, they will also be HIGHLY volatile. At the end of the day, they are still high tech growth companies in various startup phases.

In Amazon's early days, AMZN lost 99% of its value in the tech bubble crash. But then rose well over 2000x over the following decade.

It is not something to place your entire net worth in all at once, unless you are looking for thrills gambling in the short term. However, the larger blockchain stocks can be accumulated gradually with a portion of investable cash over time, but you should expect high volatility one day to the next. In the end, many smaller startups will fold, or be merged into the larger ones, so investing in the smallest may still be much more of a gamble.