Tokenization A Whole New World Of Investing
What is the current market?
The present digital asset trading market is composed primarily of equities and investment funds (aside from cryptocurrencies). Although this comprises most of the market, it is expected to expand to include a wide range of asset classes. With the use of blockchain’s transparency, this range of asset classes can include exotic assets like artwork, sports teams, and racehorses to traditional assets like bonds, real estate, venture capital funds and commodities, almost every asset class can be tokenized.
WHICH INDUSTRIES ARE IMPACTED?
In the Real Estate industry, tokenization allows fractional ownership, which opens the doors for high capital and increased market participation. Tokenized real estate assets provide an opportunity to expand real estate investment markets.
Tokenization can also offer a more efficient commodity market by offering new market opportunities across the sourcing of commodities and trading lifecycle. Converting physical assets into tradable digital assets offers improved liquidity and lesser barriers to entry in asset classes led by institutional investors.
Lastly, we can tokenize illiquid assets like artwork, collectibles, wine, and ownership interests in private companies. With this capability, many of those that do not have access to these asset classes can now invest in them at the tip of their fingertips.
SIGNS OF GROWTH
As mentioned already, digital assets offer a myriad of benefits versus traditional securities and financial instruments used to invest. Although the market of tokenization is new, we have already seen huge signs of growth within just the past few years. As time has passed the regulatory framework is becoming clearer, signaling a potential inflection point for institutional acceptance of digital assets and integration of them into alternative asset diversification strategies.
According to MarketsandMarketsTM, the global tokenization market size is expected to grow from USD 1.9 billion in 2020 to USD 4.8 billion by 2025, at a Compounded Annual Growth Rate (CAGR) of 19.5% during the forecast period. The major factors fueling the tokenization market include the ever- increasing need to stay compliant with regulations and growing need to ensure continuous customer experience as well as maintain fraud prevention levels due to increased financial crimes. Moreover, increased alignment of customers towards contactless payments and rising demand for cloud-based tokenization solutions and services would provide lucrative opportunities for tokenization vendors.
Property tokenization is one of the most promising use cases of blockchain technology as it is a more valuable asset class than bonds and stocks combined. Real estate is the world’s biggest and most important asset class representing a total asset value of $228 trillion with 827 listed REITs globally with a total market capitalization of $1.7 trillion, 27% U.S.-based. The European real estate market has a valuation of $37.5 trillion with commercial real estate comprising roughly 20% at $7.5 trillion. In 2018, the Nordic countries saw a total of $53.40 billion invested into Sweden, Finland, Norway, and Denmark. Meanwhile, Japanese REITs managed to raise a total of $3.15 billion.
LARGER MARKET FOR INVESTORS
As mentioned before, tokenization opens many doors for investors. While it enhances the process for accredited investors, it also gives those individuals that do not have a high net worth or that do not meet the requirements to be an accredited investor, the capability to invest directly into assets they normally would not be able to through the secondary markets. There is a limit to the level of fractionalization possible with real-world assets. Selling 1/20 of an apartment or a fraction of a company share is not currently practicable. However, if that asset is tokenized, this limitation is removed, and it becomes possible to buy or sell tokens representing fractions of ownership, allowing a far broader investor base to participate. A prime example of how tokenization could change the dynamic of numerous assets is in the real estate market. The prohibitive prices that properties have in this day-an-age means that only a highly restricted number of high-net-worth individuals have the means to invest in this asset, with most retail investors unable to participate. Issuing tokens that represent a fractional ownership of a real estate asset may fundamentally change the situation. For example, multifamily and commercial real estate are primarily restricted to high-net-worth individuals due to prices of the average properties ranging anywhere from $4.5 million to $50 million. Tokenization would therefore open the market to a whole new set of investors, now able to diversify their investment portfolios into asset classes previously well out of their reach.
THE NEW CROWDFUNDING PROCESS
Crowdfunding makes use of social networks such as friends, family, and colleagues linked through social media websites like Facebook, Twitter, and LinkedIn to get the word out about a new business and to attract a wide array of individual investors. Crowdfunding has the potential to greatly expand the pool of potential investors from whom funds can be raised beyond the traditional circle of insiders, owners, relatives, and venture capitalists. With the current crowdfunding model, most real estate industry groups have different levels of minimum investment, all geared toward accredited investors who meet specific requirements for net worth or annual income. By implementing tokenization with blockchain technology, we can now open the opportunity of investing into real estate to the broader market.
Public blockchains are inherently global in nature because they present no external barrier to the global population and investors. However, in the Institutional Market, relevant KYC (Know Your Client) and AML (Anti-Money Laundering) laws and programs must be followed, and hence the broader adoption of public blockchains has been curbed. Nonetheless, several public blockchains are now performing KYC and AML – and this evolution and trust is expanding the footprint of these digital, Tokenized assets. Importantly, permissioned blockchains are also evolving, providing an important step for the Institutional investor.
Have you taken notice of the attention surrounding assets like Bitcoin or Ethereum but don’t have a sound grasp on the foundation of the technology? Take a look at an earlier blog of ours, The Future of Blockchain and Real Estate Tokenization Blog, where we break down the basics of blockchain. Have other questions around blockchain or another topic? Connect with us on Social Media or our Website!
MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.
Disclaimer: *For sold properties, actual sales price is reported. For active investments, the Estimated Current Value is based on the Managing Member’s estimate of current value. Recent acquisitions are generally valued at the acquisition price. Values may be internally prepared. This web-page/website is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of any offering of MarketSpace Capital.