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CFA® Level I · Alternative Investments · free lesson
Introduction to Digital Assets
Digital assets have moved from a niche experiment to products held through regulated exchange-traded funds, yet they still behave very differently from stocks and bonds. This module explains the distributed ledger technology behind them, the main types of digital assets, why their valuation and market structure differ from traditional assets, and the direct and indirect ways investors can own them, with the risks each route carries.
What you will learn
1. Describe distributed ledger technology and its financial applications, including consensus mechanisms, permissioned and permissionless networks, and smart contracts.
- A blockchain links blocks through cryptographic hashes, making past records very hard to change.
- Proof of work secures the ledger with computing power and energy; proof of stake with staked collateral and slashing.
- Permissionless networks are open to all; permissioned networks restrict participation to approved members.
- Smart contracts execute automatically and underpin DeFi and tokenization.
- Limits: scalability, energy use (PoW), code risk, 51% attacks and legal uncertainty.
2. Describe the main types of digital assets, including cryptocurrencies, stablecoins, tokens, non-fungible tokens and central bank digital currencies, and the role of decentralized finance.
- Cryptocurrencies are native coins that secure and pay for a blockchain; altcoins and meme coins vary widely in purpose.
- Stablecoins: fiat-backed, crypto-collateralized or algorithmic; reserve quality decides stability.
- Utility tokens give access, governance tokens give votes, security tokens give ownership or cash flow claims.
- NFTs are unique and non-interchangeable; CBDCs are central bank liabilities.
- DeFi replaces intermediaries with smart contracts, adding code and hacking risk.
3. Explain how digital assets differ from traditional asset classes in market structure, valuation and risk.
- Most cryptocurrencies produce no cash flows, so DCF valuation does not apply; supply, adoption and network effects drive value.
- Bitcoin's supply is capped at 21 million and the block reward halves about every four years.
- Markets trade 24/7 on fragmented venues; exchanges often combine trading, custody and lending.
- Control of private keys equals control of the asset; lost keys are generally unrecoverable.
- Very high volatility, unstable correlations, and fraud, hacking and regulatory risks.
4. Describe the direct and indirect ways to invest in digital assets and evaluate the risks and portfolio considerations of each.
- Direct: exchange custody, self-custody (hot or cold wallets), qualified custodians, decentralized exchanges, staking.
- Spot ETPs hold the asset and track NAV through creation and redemption; closed-end trusts can trade at discounts or premiums.
- Futures and futures-based funds earn spot return + roll return + collateral return; contango drags on returns.
- Crypto-related equities and specialist funds add business, equity and manager risk.
- Size allocations by risk budget; check custody, counterparty, costs, tax and regulation.
Module at a glance
- Blockchains chain blocks by cryptographic hashes; consensus is reached by proof of work or proof of stake.
- Permissionless networks are open; permissioned networks restrict who may validate and see data.
- Digital assets: cryptocurrencies, stablecoins, utility, governance and security tokens, NFTs, and CBDCs.
- Stablecoins are only as sound as their reserves; algorithmic designs are the most fragile.
- Most cryptocurrencies have no cash flows; supply schedules, adoption and network effects drive value.
- Exchanges that combine trading, custody and lending create counterparty and custody risk.
- Spot ETPs track NAV, closed-end trusts can trade at discounts, and futures funds suffer from contango.
This free module has 4 lessons, 12 practice questions with full explanations.