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Are commodity backed cryptocurrencies the same as stablecoins?

by Syed Shoeb
, Are commodity backed cryptocurrencies the same as stablecoins?

While fiat-backed stablecoins are not in line with crypto’s original tenet to debase fiat, commodity-backed cryptocurrencies could be exactly what we need to hedge against inflation and fiat.

Commodities have been traded for centuries and governments hold and exchange commodities as well as control the prices. Commodity trades have been the ones with greatest value proposition over fiat currencies and there will be more cryptocurrencies backed by commodities; things like water and resources like electricity and alternate energy. Bitcoin has legally been defined as a commodity by the CFTC since 2015, referred to as a “virtual commodity” in the category of “exempt commodities” alongside gold, oil and other metal and energy commodities.

Commodity-back cryptocurrencies haven’t had much demand in the past as the dollar price value and market becomes increasingly volatile, according to the Virtual Commodity Association, an industry-sponsored, self-regulatory organization for virtual commodity exchanges and custodians. The buying and selling of real commodities is exempt from CFTC jurisdiction as it assumes its spot/cash markets, unlike derivative markets, are used for operational purposes like farmers buying grain, and not for speculation.

Commodity prices have been at the lowest in decades and there is an increasing concern on the growth of precious metals like gold to their paper derivatives. A short interest in the paper market has kept a lid on the spot prices of gold and silver, however, since the global financial crisis depressed demand, suppressed inflation has strengthened the USD as commodity prices have decreased.

While real assets are at their cheapest, it is a good time for commodity-backed stablecoins to make a comeback in the market. The low inflation environment has been conducive to increasing commodity demand. Commodities are also negatively correlated with the US dollar and a lower USD encourages more buying of commodities against USD.

Using commodities to hedge against crypto and fiat

Precious metals are highly liquid and they are tradeable against fiat currencies like USD and JPY. This is an arbitrage incentive for the commodity-backed stablecoin as it can be redeemed for fiat currencies. This is practiced by wholesale investors and not individuals. What makes a commodity coin stand out as a long-term hedge is the intrinsic utility value of the metals. The natural demand will only increase in the forseeable future.

In the past, gold-backed coins have under performed, but not all ETFs are equal and the strategy of passive investing in recent years is still not tested in a volatile market environment. There is now over $5 trillion invested in ETFs globally which poses a threat to the commodity-backed coin’s stability.

Broad sell-offs in the market could lead to mass fall in prices due to increased panic among investors. At the moment, commodity-backed stablecoins are in nascent stages and are an alternative to ETFs.

Tokenizing real world assets

Digix also has a DAO governance token, DGD, which allows access to the platform to tokenize any real asset. It is a self-governing entity where holders can participate by voting and the platform gets its direction through advertising and promotion.

Though Digix isn’t a completely decentralized organization, it still relies on third party custodians and publishes holdings report for increasing trust.

Conclusion

Blockchain creates a store of value and enables the decentralized sharing and exchange of assets and information. This narrative has dictated a low volatility crypto that the world is waiting for. A commodity-backed coin might be just exactly what we need. Though a certain degree of decentralization is lost in commodity backed coins, it is better to hold that rather than fiat stablecoins or volatile cryptocurrencies.

Most importantly, commodity coins give the investor the assurance and opportunity to exchange the coin for the real commodity and thus they are always end up with a better share of the bargain.

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