The volume of crypto commodities created and traded by investors today is proliferating. Because of this there is a growing need to manage investments efficiently and freely. With the size of commodities markets, the benefits of digital or crypto commodities are clear.
What exactly is a crypto commodity?
In essence, it’s anything that exists in a binary format and is tied to a real world asset. Crypto gold is an example of a digital or crypto commodity. However, as with any new asset class, it’s crucial to weigh their pros and cons in the global financial system. Getting value from crypto commodities requires careful consideration, from choosing the right platforms and products to understanding long-term investment demands.
So let’s take a look at the whole picture; what do we need to consider?
The Benefits of Crypto Commodities
Regardless of what platform you choose, trading crypto commodities has distinct advantages. The benefits of digital commodities include:
The most severe investment barrier for an average person is the so-called KYC/AML onboarding process. In this process there are a vast number of hoops that individuals have to jump through before qualifying as accredited investors.
Apart from blockchain technology, crypto exchanges are widely credited for the vast growth in the adoption of digital crypto assets. Unlike traditional brokerage houses and banks, registration for crypto trading is substantially more straightforward. In many cases, users need only provide a name, address, and email and they are ready to go. This liberalization enables previously marginalized groups such as millennials and people over 65 to play the investment game for the first time. The result is that everyone has the capability to make and lose money — and learn a great deal in the process.
2. Lower initial deposits
Traditional commodity markets are generally inaccessible and expensive. Banks and brokerage houses, as a rule, require high collaterals, deposits, and large trading volumes. Online platforms have revolutionized trading of previously inaccessible assets for many small investors, with the invention of CFDs (Contracts for Difference). Digital trading has the potential to push the envelope even further. Users are already able to buy and sell commodities or ETFs in the form of a digital synthetic contract for as low as $5. That is a profound development for a disenfranchised population of the planet.
3. Ownership of assets
Although in the traditional centralized system your assets are in the custody of banks or brokerages, in crypto exchanges you have the power to withdraw your investments to your private key. That is a major innovation, because it gives you the freedom to trade your assets on any platform. You are not held hostage to a particular bank, and your switching cost is negligible.
Moreover, for the first time in the history of financial markets investors are able to protect themselves from financial crises and the resulting bank shutdowns, or haircuts. Had crypto commodities existed during the Greek crisis, it would have been much easier for Greek investors to keep their wealth intact.
4. Safe haven investment
A safe haven is an investment that is expected to retain or increase value during times of market turbulence. Safe havens are sought by investors in order to limit their exposure to losses in the event of market downturns. For years, gold maintained its value over time, and it has served as a safe haven or insurance policy against adverse economic events.
Challenges of Crypto Commodities
In our digital age it’s hard to make a strong case for not using digitization. However, the adoption of any new asset requires a careful assessment to make sure it merits the investment of time and money to implement. For your investment portfolio to see the benefits of digital commodities, you need to consider the following points:
1. Illiquid Markets
Crypto commodities are closely tied to cryptocurrencies. The entire crypto market has a market cap of about $250 billion. That is tiny compared with the $300 trillion of traditional assets, and the crypto market is still vulnerable to large inflows from the trillion-dollar pension funds. However, the institutional infrastructure has vastly improved. Just look back to years ago. In 2017 there were no regulated exchanges, but now there are more than 20. In 2017 there were no regulated custodians but now there are at least ten, such as Fidelity, Coinbase or BitGo, which are fully insured and regulated. Cryptocurrencies have come a long way.
2. Scalability problem
Blockchain technology is still slow and naive. Bitcoin blockchain processes 4.6 transactions per second (TPS) and the Ethereum maximum capacity is about 15 TPS. That is minuscule when compared to Visa, which has 65,000 TPS. It’s still not viable to build a scalable blockchain trading platform. You’re always at the mercy of the protocol. The only solution, for now, is in centralized exchanges that are not dependent on the speed of blockchain technology.
3. Regulatory environment around the world
Innovation is stifled whenever you apply stringent regulations. Digital asset regulation is fragmented globally. In major jurisdictions such as the US, the EU, and China, the market is self-regulated, in a so-called grey zone. In addition, most of the world’s population is excluded from the markets due to investor protection programs. Only 2-3% of people in the world are qualified as accredited investors, and the remaining 97-98% are excluded. What is keeping digital commodities from mass adoption is the lack of pro-business regulation. The lighter the touch a regulator applies, the better it is for the entire ecosystem.
There are pros and cons to consider, but for the most part the benefits of crypto commodities definitely outweigh any challenges. Crypto commodities are a scalable solution that can grow with your investment portfolio. If you make sure that this solution meets your investment profile and strategy and has lifesaving buy-ins, you’ll reap its rewards.