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Tokenised commodities: what you need to know

By Ashley Norris
November 6, 2019, 7:12 PM GMT
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    How technology and tokenised commodities are making trading in the likes of gold, oil or platinum simpler

    If you are a regular trader, chances are at some point you have probably considered investing in commodities like gold, oil or platinum.

    Predictable, invariably stable and maybe even a little dull, they're the place that some traders turn to when news of economic turbulence hits. This is because when stocks and shares slide, history has shown that commodities often tend to hold their value. So some investors are keen on commodities as they feel that their steady nature enables them to diversify their portfolio and perhaps undertake riskier bets on stocks or crypto. So what exactly is a commodity trading and what is a tokenised commodity?

    What is commodity trading?

    You can of course go and buy a barrel of oil and store it in your shed, or maybe get a gold bar and keep it under your mattress.

    Funnily enough though most commodity investors don’t do this. They invest in commodities in one of two ways. Firstly via Exchange Traded Funds (ETFs) – baskets of commodities that track an underlying index – which trade on an exchange and can be purchased and sold in a manner similar to stocks. If, for example, you were to buy one share in the US Oil Fund (USO) ETF this would give you exposure to roughly one barrel of oil.

    A second option is via a Futures market, where a person buys a commodity in the future for a set price. They are then banking on the price rising to make a profit on their purchase. This can be lucrative, especially if the investment is leveraged. Yet investors need a fair amount of capital to do this and there can be significant risks involved.

    The advantages of tokenised commodities

    In recent years a concept called tokenisation has emerged that has addressed some of the key issues with trading commodities.

    Put simply, tokenisation enables commodities to be diced up into small segments and offered for trade in exchange for tokens. So, for example, a platform may have bought a certain number of barrels of oil, and it can then offer smaller amounts of oil to investors who swap their fiat cash or cryptocurrency for tokens.

    The technology that underpins this is blockchain provides a system where each transaction — that generates the token — can be immutably verified, not tampered with and is accessible to all parties. This is crypto-commodities.

    Blockchain has led to the creation of smart contracts — bits of computer code which when activated trigger a process — thereby delivering a transparent record of complicated transactions, a way of reducing fraud and a method of tracking goods.

    If there are third parties such as lawyers involved in the buying process, as there are with some commodities, in theory with blockchain their role can be minimised thereby saving time and money.

    Further with blockchain the settlement is in real time, which adds a degree of liquidity to the commodities that makes them easier to trade and ultimately more attractive.

    Tokenised commodities could lead to even more options for investors. For example, a token could represent a fraction of a gold bar, which could mean that any investor could own gold. It should be noted though that there may be issues with weight and purity, as well as authentication, which would have to be overcome before this type of tokenization is more widely adopted.

    Similarly power and gas tokens could represent smaller elements of a company’s, or even an individual’s output. Blockchain, for example, could be used to enable localised energy producers and buyers to trade.

    The future for tokenisation

    From an investors’ perspective one of the most important elements of tokenisation is that items that previously had limited liquidity, can suddenly be traded quickly and easily. And this may lead to some interesting new investment opportunities in the future.

    And it is not just commodities but also hard assets that may prove popular with investors, as they are now able to enter markets that previously were either unattractive to them through the lack of liquidity, or more likely were too expensive for them to speculate on (ie property, works of art etc).

    The advent of tokenisation has led to a rush of start-ups offering ways for investors to offer tokens in their owned assets. By far the most high profile have been the Real Estate Investment Trusts (REITs), for investors that wish to diversify their portfolio to include real estate yet can't afford to invest in a whole property.

    Others have even pioneered tokenised marketplaces where people have even offered tokens as part shares of bizarre assets such as fur coats and intellectual property (music/games publishing).

    It will be fascinating to see if this level of tokenisation proves attractive to asset owners and investors and how far it permeates the world of mainstream investing.

    For most investors now though, the opportunity is around tokenised commodities in gold, platinum, gas and oil and this is what we offer on the currency.com website. Investors can use their cryptocurrency to invest in tokens and never have to worry about taking delivery of the actual item, thereby ensuring your garden shed remains oil drum free. Welcome to the world of crypto-commodities.

    FURTHER READING: tokenised commodities

    FURTHER READING: what is a commodity?

    Tokenised securities are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how tokenised securities and leverage work and whether you can afford to take the high risk of losing your money. Nothing in the above article should be regarded as a recommendation to trade generally, to trade on a particular platform or to trade in a particular asset. Asset prices can go down as well as up and past performance is not a guide to future performance. Investors and traders should thoroughly research an asset or strategy before making any trading or investment decision and if necessary seek professional advice.

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