All the Unknowns of Trading Tokenized Funds

The Venture Capitals that we are all familiar with belongs to a small club of old men whom are rich enough to sway the financial flow of the world. Recently, however, a new form of investment threatens the status quo. From the same technology that brought us the famous cryptocurrency Bitcoin, comes another explosive offering, fund tokenization. Tokenized funds allows somewhat the levelling of the playing field. Whereas traditional venture capitals only allow for the richest of the rich to dip their feet into the waters of their massive funds, fund tokenization lets in smaller players to ensure more investments coming from a more diverse global fund sources. This article, however, aims to explore another aspect of fund tokenization. Although tokenized funds has a bright future ahead of it, there are also plenty of reasons to pump the breaks. Mainly, the unknowns are to be figured out first before being able to make any form of projection for the new generation investment that is backed by a technology that is generally still under observation. This article aims to address these unknowns and aims to let the readers decide for themselves should they continue with their intentions to invest in fund tokenization.

How exactly is the money going to be used?

Normally, investors would want to know how exactly their investments are going to get spent. This is due to a few reasons. Mainly, they obviously would want to know if their hard earned investment is going to be earning money based on how it is being invested. And secondly, they may also have reservations on where their money is going be it political, social or religions. In deciding which assets to buy, knowing how these investments are doing is a big deciding factor to whether invest in these funds or to pass the opportunity.

VCs will normally not share most of the information that points to its performance from the public. This is can be a blow to the confidence of investors choosing to invest in any form of fund. They do however still clearly present about how the investors are going to get back their money whatever the outcome but this information is only between the investors and the VC financial managers. As these funds are being sold as securities to investors, this secrecy can often cause problems. The biggest one is having to pass financial institutions that limit the movement of massive money without all the information needed. This makes VC funds extremely inflexible and almost impossible to be traded.

When VCs is powered in fund tokenization, this obscurity becomes more pronounced. Crypto tokens can be sliced into different pieces and could be backed by particular assets that could be impossible to trace. For instance, a tokenized fund could be backed by both artwork and a cryptocurrency, this means that despite knowing where exactly the funds are taken from, you will also need to know how these funds are being divided. This divisibility makes it harder to get the general feel of how the investment is doing.

There could be too much uninvested fund.

The name of the game is to make sure that the money is working for you at all times. When dealing with VCs, this could not be the case all the time. When the old VCs make capital calls, they often already have laid out plans on where to use the money. On average they make a profit of it at 20% which is amazing if you think about all the money that is being put into these funds. When storing these funds into something passive as interest making institutions like banks or giving out loans however, the return of investment could be as slow as 2%. That means it is 10 times less effective to store money in a bank than just deep dive and invest into something semi-risky.

Tokenized tokens did not have this flexibility when it has just started. As the first of its kind, the Bitcoin’s intention in its first call to funds is to increase its value and this can only be done by having more investments backing it. You could say that the investments are part of the reason why the value of the coin kept growing and growing and thus that contributed to the profit that the investors will then soon reap. This is not the best practice going forward however as the value of the coin will start to stabilize and thus the value backing the crypto based assets will soon be affected negatively by the stunted growth brought upon by over-investing.

There is a simple remedy in this however as the traditional VC pattern can be emulated as the cryptocurrencies and fund tokenization in general matures. The question remains though if the fund tokenization profitability survives long enough till the value of the blockchain based technology finally becomes more predictable and it’s value, somewhat, flatlines.

The cost of making money

Sales cost is the term investors use to the expense that they accrue in financial management services. This money goes directly into the financial managers as well as all the money they need to do marketing, research, and directly talking to potential clients. Here is where fund tokenization takes home the bacon. As, everything is digital when it comes to blockchain technology, it come as no surprise that the entirety of the fund tokenization process can be done without human intervention thus cutting out the middlemen and the cost to keep them. In fact, the execution of the securities derived from these tokens can be programmed to keep its rules inside them. There are however, still some costs should be taken into account. For instance, running the servers will require a tremendous amount of energy, and the interconnectivity can only be guaranteed through secure fast lines of communications.

Conclusion

Fund tokenization definitely has a future in the industry. It is however wise to bide your time should you not find the opportunities that you are looking for.