What is Tokenization and Is It Right for Your Investment Strategy?

Imagine owning a work of rare fine art. Or a downtown high-rise. Or a portion of an exclusive hedge fund.

As appealing as any of these might sound, the truth is that such opulent assets are far beyond the reach (and budget) of most investors. Even high-net-worth investors might experience sticker shock when considering investments like these.

But that doesn’t mean there isn’t a place for seemingly inaccessible items such as artistic masterworks or luxurious properties in an accredited investor’s portfolio.

Thanks to “tokenization” — a process where larger assets (or ownership rights to the assets) are “broken down” into smaller, blockchain-based units — investors may now be able to own small slices of big-ticket investments.

[What is Alternative Investing? Check out our list of the best books on alternative investing.]

Tokenization helps democratize the investment process by enabling investors to own fractional shares of assets that otherwise have high barriers and extended lock-up periods.

But if the prospect of including digital assets in an investment strategy makes some traditional investors uncomfortable because they associate blockchain-based assets with often volatile cryptocurrencies, they should know that the two asset classes are very different. Cryptocurrencies are decentralized and unsupported by real-world assets, whereas tokens reside “on top” of established blockchains and are managed by the companies and organizations that issue them, helping to mitigate their risk.

Investment Heavyweights

The stability tokens offer may be one reason tokenization has gained mainstream traction. Some of the most recognized names on Wall Street are now deploying blockchain-supported tokenized investment vehicles.

Earlier this year, investment giant BlackRock introduced BUIDL, an Ethereum-based tokenized fund that garnered $245 million in investments within days of its launch. BUIDL — which invests in cash, short-term debt securities, and U.S. Treasury bonds—is now the world's largest tokenized fund. Meanwhile, Citigroup USA Inc., Franklin Templeton, HSBC, and J.P. Morgan have also announced plans to leverage blockchain technology to tokenize credit, bonds, precious metals, and other assets to attract token-curious investors.

(It should also be noted that, as the market for fine art cools, affluent collectors are leveraging their prized collections to secure loans and maintain liquidity. Tokenization may offer one way to reshape and revitalize the fine art market.)

Accredited investors are taking notice. Last year Ernst & Young reported that:

“institutional investors are projected to allocate 5.6 percent of their portfolios to tokenized assets by 2026,” while high-net-worth investors are anticipated to have “an even higher allocation of 8.6 percent,” indicating both segments of investors are “at the forefront of adopting tokenization, with smaller institutions and investors leading the way.”

Why are established investment heavyweights and high-net-worth investors so aggressively climbing into the digital asset arena?

As JP Morgan explained in 2023 when it launched Onyx, a blockchain-based banking system that includes an asset tokenization platform:

“We identified key pain points in the asset and wealth management industry regarding the current state of portfolio management, and envisioned how tokenization could power a future of simpler, broader access to diversified, high performing investments.”

Indeed, as global investment opportunities become more intricate, many investors recognize the need for a simpler, more efficient way to include often complex, illiquid alternative assets — such as real estate, venture capital, hedge funds, and more — into their investment strategies. For those accredited investors who want to include alternative assets in their portfolio, tokenization may be one pathway worth considering.

Are you an accredited investor who wants to include real estate, venture capital, and other alternative assets in your investment strategy? Contact Avestix to learn how we can help.

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