Library/CFA (Chartered Financial Analyst)/Alternative Investments — CFA Program Curriculum (Level I, Volume 8, 2026)/Learning Module 7 Introduction to Digital Assets

Learning Module 7 Introduction to Digital Assets

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Overview of DLT and Blockchain5 min

This chapter explains distributed ledger technology (DLT) as a shared database architecture in which participants maintain matching copies of a digital ledger, with consensus mechanisms used to validate and immutably record transactions. Blockchain is a DLT variant that stores transactions in sequentially chained blocks secured by cryptographic hashes. Consensus protocols determine how new blocks are agreed and appended; the chapter contrasts proof of work (PoW), which uses computationally intensive mining, with proof of stake (PoS), which uses validators staking capital. Networks may be permissionless (open participation, e.g., Bitcoin) or permissioned (restricted participants; faster and cheaper). DLT supports smart contracts—self-executing code—and can improve post-trade processing, identity verification, and automation, but at material costs including high energy consumption in PoW, privacy and security risks, and evolving legal frameworks.

Key Points

DLT is a shared ledger where nodes keep matching copies and reach agreement via consensus.
Blockchain records transactions in chained blocks secured with cryptographic hashes.
Proof of Work uses computational mining; Proof of Stake uses validators staking assets.
Permissionless networks are open; permissioned networks limit participants and are faster.
Smart contracts enable programmable, self-executing transactions.

Types of Digital Assets and Tokens5 min

Digital assets are electronic assets recorded on DLT and include cryptocurrencies (Bitcoin, Ether, altcoins), stablecoins (asset-backed or algorithmic), meme coins, and tokens. Tokens can be fungible or non-fungible (NFTs); security tokens digitize ownership rights in regulated assets; utility tokens provide network services; governance tokens enable protocol voting. Central banks are exploring CBDCs as tokenized fiat. Many cryptocurrencies have supply rules (e.g., Bitcoin cap) but lack conventional cash-flow fundamentals; prices are driven by market expectations, scarcity perceptions, network adoption, and speculation.

Key Points

Cryptocurrencies transfer and store value on blockchains; Bitcoin and Ether are dominant.
Stablecoins aim for price stability via collateral or algorithms but carry reserve and design risks.
NFTs are unique tokens representing single digital or physical assets.
Security tokens represent regulated ownership claims; utility tokens provide access to services.
Governance tokens give voting rights on protocol changes; CBDCs are central bank digital money.

Investment Forms and Market Infrastructure6 min

Exchanges are centralized (private servers, custody, liquidity; subject to hacks and counterparty risk but more regulated in some jurisdictions) or decentralized (on-chain automated exchange, harder to shut but difficult to regulate). Direct investment requires wallets and private keys and carries theft, loss of keys, whale concentration, market manipulation, pump-and-dump, and ICO scam risks. Indirect investments include coin trusts, futures, ETFs using cash/derivatives, crypto stocks, hedge funds, and funds-of-funds. Asset-backed tokens and tokenization enable fractional ownership and potentially improved liquidity of physical assets but may be classified as securities. DeFi (decentralized finance) is a growing ecosystem of dApps and smart contracts offering lending, trading, and other financial services without centralized intermediaries; it also carries smart-contract, composability, and systemic risks.

Key Points

Centralized exchanges provide liquidity and custody but introduce counterparty and security risk.
Decentralized exchanges (DEXs) operate on-chain and reduce single-point failures but complicate regulation.
Direct ownership requires secure private-key management; lost keys can make assets irretrievable.
Indirect vehicles (trusts, ETFs, futures, hedge funds) offer access without direct custody but add fees and tracking differences.
Tokenization and DeFi enable new products but bring operational, legal, and smart contract risk.

Risk, Return, and Diversification Characteristics6 min

Empirically, Bitcoin has exhibited very high returns and volatility, showing low-to-moderate historical correlation with equities and low correlation with bonds, implying potential diversification but with correlations that can rise during market stress. Digital assets lack conventional cash-flow fundamentals; valuation is driven by expected future appreciation, scarcity, network effects, and speculative demand. Major risks include regulatory uncertainty, fraud and market manipulation (pump-and-dump and Ponzi schemes), custody and exchange counterparty failures (e.g., exchange bankruptcies), stablecoin reserve and design risks (e.g., algorithmic depegging), concentration among large holders ('whales'), and technical risks in smart contracts and network security. Institutional adoption increases infrastructure and may change correlations and liquidity characteristics over time.

Key Points

Digital assets have historically high volatility and returns but uncertain fundamental valuation.
Low historical correlations with traditional assets create potential diversification benefits.
Regulatory, operational, custody, and fraud risks are material and evolving.
Stablecoins and algorithmic designs can fail and cause contagion in crypto markets.
Institutional participation may raise liquidity but also increase correlations with traditional markets.

Questions

Question 1

Which statement best describes a distributed ledger?

Learning Module 7 Introduction to Digital Assets

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