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Can you tell me What comes to mind, when you think of investing? 

For many, the traditional “stock market”

And it’s true, there are many perks of investing in the stock market. 

For one, it provides a way for investors to own a piece of the companies they believe in, allowing them to share in their successes and profits. Despite its various perks, the stock market has several shortcomings.

One of the major concerns of these traditional finance markets is all about the overvalued stocks such as Paytm, GameStop, AMC Entertainment, McCormick, and many more.

But the question is why do these companies overvalue their stocks, What’s the catch behind it? And is there any solution for it

Well, the answer is YES…

And there is one & only one solution which is Tokenization…

Yeah, you heard it right!!! 

Tokenization

Tokenization Basics

Tokenization is the process of digitizing real-world assets, like real estate or art, into tokens on a blockchain network.

Well, tokenization is not a new concept. It has been around for a while, but it gained momentum in 2017 when Overstock.com accepted Bitcoin as payment. 

Several tokenized stocks such as Google and Microsoft, & Netflix are traded on platforms like Binance and Bitpanda. Tokenization makes investing more accessible, efficient, and cost-effective.

There is no doubt that traditional stock markets have some limitations in terms of accessibility, transparency, overvalue, and liquidity, making it challenging to buy and sell assets easily and quickly. Fortunately, tokenization has the potential to overcome many of these shortcomings.

How Overvalued Stocks Impact the financial market  

Let’s take the example of “Company Z,” a YouTube channel seeking to expand its reach and content. They decide to raise funding by offering a small percentage of their company. 

In their series A funding round, they dilute 5% of their own stocks and raise 1 million dollars from StreamHoldings. This puts the valuation of Company Z at 20 million dollars.

Later on, after the company grows and profits increase, Company Z decides to raise a series B funding round by offering another 5% stake in the company for 2 million dollars. 

This time, the investment comes from a company called TubeInvestments which values Company Z at 40 million dollars. Although the Series A investors have made double profits on paper, but they can’t just sell their shares and make a huge profit instantly. 

Instead, they wait for a grand exit, which will come in the form of an initial public offering (IPO) or another similar event. You might have seen how Paytm & Zomato’s IPO crashed.

So, before going IPO, Company Z would want to ensure the share price doesn’t crash after the IPO. That’s why just before going for an IPO, Company Z will approach their millionaire friends Bob & Alice and ask them to buy some shares at a discounted price in bulk. 

Company Z decides to sell 10% of their company in IPO to the public, including selling 2% of shares from each of the original investors. Investors can profit once Company Z successfully completes its IPO and raises capital.

The original investors, including StreamHoldings and TubeInvestments, have made nearly 4 million dollars each & pre-investor (Bob and Alice) would be making a profit too as they got stock at a discounted price.

Meanwhile, Company Z’s founders also make a substantial profit.  But in reality, the market might expect Company Z to deliver results that aren’t realistic or attainable because of its overvalued hype.

And when the expectations are not met, the stock price can fall sharply, causing significant losses for investors who bought at a high price.

So, how do normal investors like us, save ourselves from this, what’s the solution to it? And that’s where tokenization comes into play.

But how?

And how does tokenization overcome such flaws???

Tokenization as the Solution & Benefits 

Well, tokenization offers fractional ownership, allowing multiple investors to own a portion of an asset, making it more accessible. Companies like Harbor, RealT, and Swarm Token enable fractional ownership of real estate. 

For example, let’s say there is a rare digital artwork worth $100,000. 

This digital artwork can be tokenized into 1,000 digital tokens, with each token representing 0.1% ownership. Investors can purchase tokens based on their budget and goals. 

Masterworks pioneered this concept by tokenizing famous artworks like Banksy’s “Laugh Now” painting. 

Tokenization not only enables fractional ownership but also reduces fees by eliminating intermediaries and provides transparency and security through blockchain technology. 

Each token is unique and can be tracked, reducing the risk of fraud and providing clear ownership records. Unlike traditional stock markets, you won’t be getting overvalued tokens, the price will eventually be the same for everyone.

But every coin has two sides, and Tokenization is no exception, as it comes not without its challenges and risks.”.

Challenges and Risks 

Regulation is a major challenge for tokenization, as the rules are unclear and there’s a risk of fraud. Tokenization platforms like Polymath, Harbor, and tZERO are addressing these challenges. 

They use KYC and AML tools for compliance, advanced security measures, and smart contracts to protect digital assets and prevent fraud. These examples show how tokenization can disrupt traditional finance and provide new investment options.

So, what does the future of tokenization hold? 

Tokenization and the Future of the Stock Market

Tokenization has the potential to disrupt the traditional stock market, with a projected market capitalization of tokenized assets reaching $1.5 trillion by 2030. It offers a more efficient and cost-effective way to trade assets, reducing the reliance on intermediaries. 

Despite challenges, we believe tokenization will revolutionize investing and make it more accessible and inclusive. With the right regulations and infrastructure, tokenization will shape the future of the stock market.