They say that it “takes money to make money” and this is particularly true when it comes to investing in cars. While an average new vehicle loses 30% of its value in the first 12 months and continues to depreciate for years, limited edition supercars like the La Ferrari tend to go up in value almost immediately after they are sold. Writing for Top Gear, RM Sotheby’s Max Girardo argues that “almost any limited edition hypercar” is a good investment.
Up until recently, however, the only people who could profit from this appreciation were wealthy elites who had the bank balance and connections required to pay big money upfront. However, now a new investment technology has emerged that will make it possible for everyone to invest in these cars. This technology, which is likely to shake up the supercar market, is called asset tokenization.
WHAT IS A CRYPTOCURRENCY?
In order to understand asset tokenization, you first need to have a basic understanding of what a cryptocurrency is. A cryptocurrency, like Bitcoin for example, is a digital currency that uses encryption technologies to regulate the supply of the currency and transfer of funds. The value of a cryptocurrency is solely based on what other investors in the marketplace perceive it to be worth, however, and the lack of any tangible underlying asset can lead to volatility. Whereas one Bitcoin traded at around $120 in 2013, for example, during the boom in December 2017 it was trading for $19,000, but it is now worth around $3,300.
WHAT IS ASSET TOKENIZATION?
Asset tokenization refers to a process whereby a new type of crypto asset is created which is directly backed by a physical asset such as a car. So imagine a limited edition supercar that currently costs around $800,000. Needless to say, most people could not afford this purchase price. If 10,000 investors combined their resources and each invested $80, however, the car could be purchased.
WHAT IS A “SECURITY TOKEN”?
In the case above, each investor would then receive a “security token”, which would be directly backed by the value of the car. If the car increased in value by a given amount, say 20%, the car would be resold and the investors would receive the initial cost of their token and an additional profit proportional to the increased value of the vehicle. This investment mechanism means that the highly exclusive and historically lucrative supercar market is now open to everyone.
WHAT ARE THE BENEFITS OF ASSET TOKENIZATION?
The main benefits of asset tokenization are as follows:
- Liquidity/Divisibility: Tokenization enables you to invest in an expensive asset like a supercar, without needing to buy the whole car (and pay the whole purchase price). While this was not impossible before, investors typically had to pay a so-called “illiquidity discount” of up to 20-30%. By using tokenization, these costs can be avoided.
- Diversification: Tokenization enables you to diversify your risk by buying tokens in multiple cars. This means that if one car does not perform well, the loss could be offset by profits on other cars.
- Lower Cost: As there are very few middlemen involved, fees are relatively low.
- Compared to a conventional investment, there is very little bureaucracy. Everything can be controlled and monitored online.
- Faster Settlements: The higher liquidity and automated nature of the system mean that transactions are much quicker.