1.12 Digital Assets, Real Estate & Metals
This chapter covers assets outside stocks and bonds: property and precious metals you own directly, and digital assets such as cryptocurrency, stablecoins and NFTs. Exam questions and client conversations about these assets usually come down to the same things: what hedge they offer, how liquid they are, whether they count as securities, and whether the client can stomach the risk.
What each topic covers
Direct Real Estate & Precious Metals compares owning property outright with owning REITs. Direct owners keep the full economic benefit of renting or selling, may deduct some expenses if the property is rented or held as an investment, and get a hedge against both market and inflation risk. The main drawback is liquidity: a sale can take weeks or months. Gold, silver, platinum and palladium are negatively correlated with market returns and positively correlated with inflation, but they can carry large fees and attract fraud.
Cryptocurrency, Stablecoins & DeFi starts from the IRS definition of a digital asset and notes that the IRS does not treat any digital asset as a currency. It separates three types: fungible cryptocurrencies, stablecoins pegged to a fiat currency, asset or commodity, and non-fungible tokens that are each unique. It explains public and private keys, the three wallet types, blockchain, smart contracts and DeFi loans. The regulation section applies the four-part Howey test and explains why Bitcoin is treated as a commodity while many other tokens and ICOs are treated as securities.
Digital Asset Risk & Investor Profile works through benefits, risks and typical investor. The benefits are capital appreciation and added diversification. The five risks are price volatility, fraud (phishing, pig butchering and high yield investment programs), hacked or lost assets, market manipulation (pump and dump, wash trades, false information) and platform failures. Digital assets are speculative, suit highly aggressive investors with long time horizons, and many advisers cap them at 5% of a portfolio.