As decentralized finance progressively finds uses in the traditional financial world one aspect to consider is investment in or trading of digitalized or tokenized versions of stocks. This opportunity is offered by many crypto exchanges but not yet to American citizens. With time it may well be and thus one needs to consider if they want to trade stocks or digitalized versions of stocks. What are the advantages of tokenized stocks and what are the risks?
What Are the Two Kinds of Tokenized Stocks?
All tokenized stocks are meant to track the value of the underlying stock and allow investors or traders to take advantage of price fluctuations over time without having to convert their crypto assets to dollars, euros, yen, etc. The most secure version of this asset is a token that is secured one to one by a share of the actual stock held by a trusted custodian, much like with a stable coin like USDT or USDC. The difference is that with a stable coin your value is linked to a fiat currency and which a stock token you are tied to the fluctuating value of a stock like Nvidia, Microsoft, Apple, etc. There is also another way to go if you want tokenized stocks. These are called synthetic tokens.
The Riskier Version of Tokenized Stocks
An alternative to trading tokens backed one to one by actual stocks is to invest in or trade tokens that represent the current value of a stock without the exchange having real world stocks to back up the stock token. These are called synthetic tokens and use derivatives like options or futures, smart contracts or blockchain oracles instead of being protected one to one by stock shares held by a trustworthy custodian.
Advantages of Tokenized Stock Ownership or Trading
Tokenized stocks can be traded around the clock even when markets are closed. They do not require you to convert crypto to dollars, euros, or yen in order to buy or sell shares. Tokens can be bought or sold on the blockchain just like any other digital asset without having to own a brokerage account or follow the sorts of limitations imposed by brokerages on traditional stock traders.
Risks of Synthetic Stock Tokens
Beware of this way of buying and selling stock tokens. It is highly leveraged and potentially very profitable to the exchange that offers this option. However, the benefits do no exceed those of tokens backed one to one by real shares of stock held by a trusted custodian. Rather they are similar to trading stocks that trade at low volume and liquidity. Trade these types of tokenized stocks and you run the risk of huge price fluctuations and the risk of losing all of your assets due to what is called counterparty risk.
Is Trading Tokenized Stocks a Good Idea?
If you are comfortable working in the crypto world and want the advantages of buying and selling around the clock instead of either waiting for markets to open or trading futures in the off hours, tokenized stocks offer distinct advantages. If you want to do this stick to asset backed tokens that are matched one to one by shares of your stock of choice held by a trustworthy custodian.
Microsoft Share Price
Status of Tokenized Stocks in the USA
Bit by bit the US regulatory framework is adjusting to allow tokenized stocks. The SEC this year has been setting up rules and regulations regarding tokenized stock trading and even OKed the Wisdom Tree tokenized money market fund for trading USDC with Ethereum with real time settlements. Step by step the US is moving toward adopting buying and selling of tokenized stocks. So, get ready but remain aware of not only the benefits of this way of trading stocks but also the potential risks. Even if you use a stock backed token approach, remember that the stock market itself is prone to risks and is best approached with long term intrinsic value analysis instead of simply following the herd into a potential market crash!