What are digital assets? The investor's guide to bitcoin and blockchain

Blockchain and cryptocurrencies like Bitcoin aren’t just disruptive forces that are transforming the way people, businesses, and governments transact and share information. These digital assets have become a major asset class for investors looking for potential returns and diversification. The cryptocurrency market alone comprises more than 20,000 cryptocurrencies representing over $2 trillion in market capitalization.¹

The digital assets ecosystem also includes companies that mine cryptocurrencies and provide technology, as well as companies that stand to benefit from blockchain’s myriad uses. 

Each of these aspects of the digital asset ecosystem presents an opportunity for investors. Even if you don’t plan on investing in digital assets, it’s valuable to understand how all the parts fit together.

What are blockchain and cryptocurrency?

A blockchain is an unchangeable database that allows data to be recorded and distributed across countless computers globally. It provides benefits in terms of decentralization, security, and transparency compared to traditional methods of transacting and sharing information.

The applications of this technology aren’t limited to cryptocurrencies: Blockchain has a wide—and rapidly expanding—array of uses that could change the way consumers, companies, and governments transact and share information. Example uses of blockchain technology include secure medical record storage, insurance claim fraud prevention, and food safety traceability.

Some of today’s most well-known companies are leveraging blockchain technology. Mastercard is an interesting example. Mastercard provides financial transaction processing services and allows people to use its debit and credit products to purchase crypto. When people want to transact in cryptocurrencies, Mastercard can help them use their crypto balances everywhere Mastercard is accepted.²

First invented in 2009, cryptocurrency is decentralized digital money based on a blockchain. More precisely, a cryptocurrency is a non-traditional, digital form of currency. It is a medium of exchange that uses cryptography to validate and secure transactions. Bitcoin is the first and most widely used cryptocurrency, and other cryptocurrencies collectively are referred to as altcoins. The space continues to grow and evolve as new players enter the market.

Besides blockchain and cryptocurrencies, what else is in the digital asset ecosystem?

There are a host of players, technologies and financial instruments involved in bringing digital assets to life—and each aspect presents an investible opportunity. 

What companies and technologies help in the production and use of digital assets?

Blockchain users: Companies that are involved in the research and development of blockchain technologies for cryptocurrencies and other commercial applications. 

Cryptocurrency buyers: Companies that report crypto assets on their balance sheets.

Cryptocurrency miners: Companies that mine cryptocurrency assets, bringing them into existence. Miners are critical to the blockchain since their computational power keeps the network secure. By solving complex computational problems, they are rewarded in coin and permitted to update the ledger. The Proof of Stake model (ethereum's methodology) validates block transactions based on the number of coins a miner has, whereas Proof of Work (bitcoin's methodology) validates based on network computing power. The Proof of Stake model requires far less electricity to operate than the Proof of Work model.

Enabling technologies: Companies that facilitate the buying, selling, or transfer of crypto assets; provide custody for crypto assets; or create semiconductors or cryptocurrency mining technologies.

What are some investment products for investing in digital assets?

In addition to owning cryptocurrencies directly, a host of investment products and vehicles have emerged that allow investors and companies to get exposure to digital assets.

Spot Bitcoin ETFs: Exchange-traded funds that expose investors to the world's largest cryptocurrency. ETFs are more efficient and liquid than other funds. Invesco's unique partnership with crypto native Galaxy led to the Invesco Galaxy Bitcoin ETF (BTCO), which debuted Jan. 11, 2024.

Cryptocurrency derivatives: Financial instruments with value based directly on the price of an underlying cryptocurrency.

Trusts and exchange-traded products (ETPs): Investment products that are linked to cryptocurrencies or funds that provide broader exposure to digital assets. Investment managers, such as Invesco, have launched exchange-traded funds that invest in digital assets.

Proprietary investment products: Hedge funds and other non-exchange-traded investment vehicles that invest in cryptocurrency.

What other digital asset terms should an investor know?

Digital assets, and cryptocurrencies in particular, involve many terms that may be new to most investors. Here are some of terms investors should know.

Decentralized finance (DeFi): A system enabled by blockchain in which financial transactions are made directly between buyers and sellers without needing to be facilitated by banks or other centralized financial institutions.

Exchanges: Platforms where cryptocurrencies can be bought and sold for a fee. There are decentralized exchanges (users are matched with buyers/sellers using their own wallets) and centralized exchanges (users create an account with an exchange that holds their cryptocurrency assets).

Initial coin offering (ICO): A mechanism that entrepreneurs use to raise funds to launch a new cryptocurrency coin. ICOs have come under increasing regulatory scrutiny because they require no formal filings.

Token: A digital asset that represents a tradable asset on a blockchain network. Tokens, which can be used for transactions, must exist on the blockchain of another cryptocurrency (like bitcoin) because they don't have their own.

Wallet: A device or service in which Bitcoin and other cryptocurrencies are, in essence, held for use. It is important to note that wallets facilitate holding cryptocurrencies, whereas an address is specific to each blockchain and is used in transactions.

How do the different parts of digital asset ecosystem work together?

Seeing how the various aspects of the digital asset ecosystem work together can help investors identify opportunities to get exposure to the asset class (see the simplified, hypothetical visual below). Miners create cryptocurrency and other digital assets, which come in various forms and types. The creation, transaction, and recording of these digital assets take place using blockchain technology. Buyers and sellers of digital assets can exchange them via blockchain technology or get exposure to them via investment funds, like hedge funds and exchange-traded products (ETPs) including The Invesco Galaxy Bitcoin ETF (BTCO). These types of investment funds either invest directly in digital assets or invest in companies and institutions that leverage blockchain technology.

Invesco digital asset ETFs: Efficient exposure to an emerging asset class

Digital assets are a dynamic, growing asset class that is constantly evolving as consumers, companies, and institutions find more ways to use blockchain and cryptocurrencies. Their rapid expansion highlights the value of considering broad, diversified exposure to digital assets.

In 2024, Invesco partnered with Galaxy to launch the Invesco Galaxy Bitcoin ETF (BTCO). Invesco is a global ETF franchise with a diverse selection of 200+ forward-thinking ETFs. Galaxy is a digital asset and blockchain leader with a wealth of traditional finance expertise and deep crypto know-how. The combined experience informs BTCO, which provides bitcoin exposure while helping to mitigate the risk of managing personal digital wallets and dealing with unregulated crypto platforms.

In 2021, Invesco launched two digital asset ETFs, the Invesco Alerian Galaxy Crypto Economy ETF (SATO) and the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BKLC). SATO and BKLC give investors efficient access to opportunities across the asset class. 

Whether you’re looking for investment opportunities related to cryptocurrencies or exposure to the broader blockchain ecosystem, Invesco offers tools for diversifying your portfolio.

Want to learn more about BTCO, SATO, BKLC, and other digital asset ETFs? Read Access blockchain and cryptocurrency exposure with ETF simplicity