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#Financefridays - What is an asset?

18/09/2020


An asset is a useful or valuable thing that is regarded as having value and able to meet debts, commitments, and legacies.


There are currently 5 main asset types:


1) Shares are also known as equities – Equity is the value of the shares issued by a company (‘When you own 100 shares of stock in a company, this is an example of having equity in the company’).


2) Bonds also known as fixed interest savings accounts or stocks, are basically where you are giving your money as a loan to the bank, for a certain time frame. Bonds are used by companies, banks, and governments, to help them finance their projects and operations.


3) Property (‘When your house is worth £100,000 and you owe the bank £80,000, this is an example of having £20000 equity’).


4) Commodities – these are raw materials or primary agricultural products, that can be bought or sold, such as precious metals (gold, platinum, palladium, rhodium, silver), energy (natural gas, ethanol, heating oil, coal, gasoline, uranium, oil), industrial metals (aluminum, lead, iron ore, copper, nickel, zinc, tin), agriculture (cotton, oats, lumber, coffee, cocoa, live cattle, lean hog, corn, feeble cattle, milk, orange juice, palm oil, rapeseed, rice, soybean, wheat, sugar…).


5) Cash – is money, and this traditionally was in coins or notes. Cash is legal tender money i.e it is government approved coins and notes. Sometimes cash can also include the value of other assets that can be easily turned into cash.




Now many might be surprised, but there is in fact a new asset class: –




6) Digital assets/Cryptoassets have finally been accepted as intangible assets. They are now protected under the law, and governments are trying to find ways to tax it, although in some circumstances they are unclear whether it would be income tax or capital gains tax.




The HMRC also notes they recognise exchange tokens like bitcoins that can be transferred to become money, as digital assets. However, they still declare they are not money by themselves. The legislation report mentions, this guidance is for exchange tokens alone, security tokens and utility tokens may have to be given different tax treatments.




Utility tokens ‘provide the holder with access to particular goods or services on a platform usually using DLT’. Security tokens ‘may provide the holder with particular interests in a business, for example in the nature of debt due by the business or a share of profits in the business’.




The UK is not the first to legalise crypto-assets. Interestingly in China in 2018 there was an ongoing court case for years, where a couple were held at gunpoint and forced to transfer 18.88 Bitcoins and 6,466 Skycoins to the robber’s account. After being arrested and sentenced to only 8 months jail time, the robbers stated they do not have to give back the coins as they are not considered assets under Chinese law. The court overruled the robber’s appeal and declared Bitcoin is a digital asset and should be protected by law.



France has also declared Bitcoin to be a valuable asset. It has ruled that Bitcoin has all the characteristics of money and should be treated as a financial instrument. This decision came about after a lawsuit involving Bitspread, an investment firm, and the paymium exchange. However, France also ruled that Bitcoin still does not have intrinsic value and will not be recognised as a currency.




Many haters of bitcoin have also changed their tune about cryptocurrencies. Big corporations like JP Morgan have been found to be having secret meetings with Coinbase over the years. They have also launched their own coins called the JPM Coin. They have now decided they support cryptocurrencies if they are properly controlled and regulated. Many find it strange how they can be skeptical of bitcoin all these years but yet support Ethereum, and now their own coin, the critics suggest it is as if they just were trying to hold bitcoin back until they could now also profit from cryptocurrency.



One CEO has made history by actually buying $250 million in bitcoin and believes it is superior to cash. In August the CEO of Microstrategy, a publicly-traded business stated, ‘this investment reflects our belief that Bitcoin, as the world’s most widely adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash’.




Microstrategy have made Bitcoin their main inflation-proof strategy, their asset reserve strategy; just like many used to use Gold as their inflation-proof strategy and still do (the gold standard), others have started turning to Bitcoin as it has proven to not only be inflation-proof, but can also be a lucrative investment. Microstrategy saw their stocks rise just from announcing their bitcoin strategy, and again the stocks surged when they bought the Bitcoins. It seems many investors are trusting their strategy and were willing to buy their stocks to be a part of it.




A crypto blogger I stumbled across, mentioned Bitcoin is only around 10 years old. Crypto-assets have only just been birthed, when is the last time you have seen the birth of a new asset class? When next will you get the opportunity to get in at the beginning of a new asset class in your lifetime. He even mentioned will you wait until it rises so much that you will need to sell your house just to be able to afford 1 bitcoin. However he also mentioned Biitcoin is still a risk, and he is not a financial advisor and nor am I.




The potential for Bitcoin, Ethereum and other digital assets should not be dismissed even with the debates and voices from the critics. I will explain the coming bull run in more detail soon as this is why many are excited. Bitcoin has finally passed the bearish threshold that indicates its rise is coming. History has shown that Bitcoin goes through a cycle of rising rapidly, (still with dips but like a staircase rising), and then it goes through what they call a ‘halfing’, as the price drops to half its value as the market corrects itself and then it rises again for 18 months passed its previous all time high.




Another part of the bull run is the fact the market cap of cryptocurrencies is only around 300 billion and with the rise of major companies now getting involved the potential for cryptocurrencies market cap becoming a trillion figure market cap is very much achievable.



My colleague informed me how he convinced his wife by buying her just £100 pounds worth of Bitcoin as a present and told her to leave it and watch it grow. She now loves looking at her Bitcoin wallet (you can also get portable wallets that you can use to buy things without having to go online). I would suggest to do your research too and realise how times are changing and think about investing in stocks and in cryptocurrencies even with just £50 pounds, buy and hold and think about getting rich slowly not quickly.




What do you think about assets and digital assets? Should schools be preparing children for the future? I even read LinkedIn has ranked the number one top skill for 2020 as blockchain coding and CNBC has reported the most in-demand job skill in 2020 is blockchain, but yet many are skeptical about blockchain and digital currencies.




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