Tokenized shares – what is it?
Many people who get into the crypto space are surprised at how much the industry is intertwined with real markets and the world. One of such objects of surprise is tokenized shares. But, how can it be?
Everything is quite simple.
According to the information on Coinmarketrate.com We can treat stocks that have been tokenized in the same way as shares of any company that are traded on more traditional exchanges such as the S&P 500 or Nasdaq. The difference is that the first ones are a digital token.
When we buy shares in the traditional way on the stock exchange or as part of an initial public offering (IPO), these shares are credited to our investment broker’s account.
The advantage of tokenized shares is that since they are a crypto asset and work on the blockchain, they can be bought and traded on a cryptocurrency exchange, just like any other type of crypto assets.
Usually, an investment and custodial organization participates in the creation of tokenization of shares.
Essentially, a company buys a stock that it seeks to tokenize, and then deposits it with another company that serves as the custodian of the stock. After that, a token is generated that represents this share in the blockchain. Its price will be the same as the price of the stock to which it is linked.
Finally, this token can be placed on a cryptocurrency exchange, where it can be bought and exchanged for another cryptocurrency. Thus, we can be affected by the share price, including its dividends, but at the same time receive the benefits of the token.
However, we must clearly understand that in this process we do not own the stock itself, but its derivative. This will be discussed later.
Also, trading tokenized stocks is not the same as trading traditional stocks. Since it is a token, it should be traded as a token.
The steps for buying, selling and trading tokenized stocks include the same steps as when trading cryptocurrencies such as BTC or ETH.
Why do companies tokenize their shares
The reason shares are tokenized is the same reason shares are created in the first place: to raise capital.
But there are several advantages why a company might want to raise capital by creating digital tokens of this asset. On the one hand, it is a good alternative to more traditional methods, such as IPOs or the issuance of new shares.
To begin with, it allows them to sell their shares to people who, for various reasons, cannot access the market where their shares are traded.
Of course, this opens up a number of problems, since cryptocurrencies and tokens are not regulated in all countries, and this method of investing falls into a gray zone that unscrupulous people can use. Moreover, the company does not necessarily create these tokens, since anyone can buy shares and turn them into this asset in order to trade them.
Another advantage is the fact that stocks can trade in more dynamic markets than those that exist in the traditional asset sector.
Examples of tokenized shares
Many of the tokens that we will look at below are well known because they are popular companies. Examples include Twitter, Tesla and Apple.
But keep in mind that there are many more of them. Maybe not all the stocks that we find in the main markets, but enough to understand the direction of the general trend.
- MIRRORED APPLE (MAAPL)
This is a tokenized version of Apple, where we see that its name is Mirrored, and it has the same symbol as the stock of the company “bitten apple”, but with a lowercase letter “m” at the beginning.
- MIRRORED TESLA (МТСЛА)
The company for the production of electric cars has become very popular, especially since its owner is Elon Musk. So this is one of the examples we can find.
- MIRRORED ISHARES GOLD TRUST (MEOW)
This is not a stock as such, but an iShare Gold Trust ETF. An exchange-traded fund that allows you to reproduce the value of gold, which in this case does it with a token.
- MIRRORED ISHARES SILVER TRUST (MSLV)
This is a version of the silver exchange-traded fund, which introduces us to this precious material without the need to buy shares as such.
- MIRRORED NETFLIX (MNFLX)
Netflix also has a tokenized version of the stock, which is interesting, given that this company has fundamental prerequisites for further value growth.
- MIRRORED UNITED STATES OIL FUND (MUSD)
The United Stats Oil Fund is another exchange-traded fund or ETF that reproduces the price of oil so that individuals can invest in it if they need to buy and sell barrels themselves.
- MIRRORED ALIBABA (MBABA)
Alibaba is an Asian giant resembling Amazon. We can invest in these stocks without much trouble if we like the company.
- MIRRORED GOOGLE (MGOOGL)
Google is one of the most valuable companies, as well as the most popular among investors. Whether it is worth buying it – we will not talk about this here. But if you’re interested, then you know.
- MIRRORED TWITTER (MTWTR)
Twitter is one of the largest social networks. However, it may go out of business in the future if Elon Musk finally buys it.
If you have seen the prices of some of these tokens, you have noticed that not all of them have the same value as the shares. This is due to the fact that they do not necessarily have to be backed up by a 1:1 ratio.
This is especially true for DeFi platforms, where they only track their price. This issue needs to be taken into account, as it is even further from the idea of owning a real stock.
Advantages and disadvantages of stock tokenization
Now that we know what it is and have seen some examples, we can move on to the part where we will talk about the advantages and disadvantages of these tokens.
Exchange tokens can be very interesting compared to traditional stock trading, where a licensed broker is required to trade:
- High liquidity: Since more people have access to this class of shares compared to traditional stocks, higher liquidity can theoretically be expected. That doesn’t mean it’s going to happen now, but it could potentially happen.
- Fast transactions: Depending on the exchange and the network where the stock is tokenized, confirmation can be as fast as a few minutes or seconds. Compared to the traditional market, this is a huge improvement, since we are talking about several working days for traditional stocks.
- We can buy shares of shares: although it is currently possible to get shares of shares, this applies to a certain group of firms.
- Tokenized versions are simpler.
- Low fees: Some exchanges may charge very low fees, even when trading between individuals directly, they may be zero.
- Round-the-clock trading: tokens can be bought and sold 24 hours a day, any day of the year. Cryptocurrency markets never close, and this is their significant difference from traditional analogues. This is a huge advantage and opens up many opportunities.
It is also important to note the disadvantages of stocks as tokens:
- We are not shareholders: with these tokens, we do not have a stake in the company, which does not allow us to participate in annual meetings and does not give us the right to vote.
- There are additional risks: other intermediaries are involved in the process, including the firm that holds the shares while we buy and sell them.
- Additional KYC Requirements: We may face additional KYC requirements when trading these shares in the form of tokens.
Despite this, we may be affected by the share price, as well as the possibility of receiving dividends on it. We must remember that this is a derivative instrument, not the stock itself, so we must take the necessary precautions.
Theoretically, anyone can trade tokenized stocks. This is the beauty of cryptocurrencies – no one stays away.
The obvious advantage is the one we talked about earlier, allowing investors to access these assets if they don’t have access to the traditional market. Thus, a person who does not have a bank account cannot register with a broker and buy shares. In some countries, even if you have a bank account, this is not possible.
So, this financial instrument opens up new opportunities.