Investing in commodities, like gold, coal, and oil, can be challenging for investors. The main reason for this is that unlike stocks and bonds, commodities are not readily exchangeable and easily available by ordinary investors. Besides, the complicated manner in which they trade via the futures and options markets can be an obstacle. However, with the invention of blockchain technology, the tokenization of commodities is now a reality.
What are commodities?
Commodities refer to the raw materials or goods that are grown or mined. A commodity market is where these commodities (precious metals, gold, coffee beans, tea, oil, grains, energy, etc.) are traded.
Throughout the history of humanity, humans have been using physical commodities as a means of representing and storing wealth. Today, with big corporates, commodities trade on stock exchanges, with trades valued in millions of dollars changing hands daily.
Gold is more accessible to the ordinary investor because purchasing gold bullion (gold in its physical form), from a broker, or in some instances, from a financial institution can easily be facilitated.
An exchange-traded fund (ETF) is a good solution that represents the movements of the underlying commodities, offering investors direct investment opportunities. But not all commodities have an ETF. For instance, gold- each share of the ETF represents a tenth of an ounce of gold. Therefore, if gold is currently valued at $1500 an ounce, the gold ETF will trade at $150 per share.
ETF is one of the easiest and cost-effective ways to participate in the gold market. However, an ETF that represents a particular industry like gold is vulnerable to high volatility.
How blockchain technology can be beneficial to the commodities market
Blockchain technology has the potential to transform how commodities are mined/harvested, delivered, funded, and traded. A gold nugget, for example, travels a long way along its supply chain, from miners to end-users. Legal systems, regional standards, manufacturing, and retail, each of which might have a distinct ledger system, cost, and potential security faults.
Blockchain-based platforms and cryptocurrencies can improve the way the commodity-trading sector operates, solving trust issues, their inadequacies, and the complex of transactions, which mostly involves several parties. Blockchain facilitates a transparent record of complicated transactions, monitor goods, and minimize fraud, making it a natural fit for commodity trading.
The decentralized nature of blockchain offers tamperproof and complete transparency along the supply chain. Trust and inefficiency are what was lacking in the commodity business for a long time.
Tokenizing commodities with blockchain technology
Tokenization unlocks liquidity by facilitating fractional ownership and eradicating the barriers to entry for investment in illiquid assets, such as commodities. In doing so, commodities can reach a broader investor base. Token offerings enable companies to transform the ownership of assets and other rights into blockchain-based tradable tokens. These tokens can be sold upfront to finance projects.
Additionally, liquidating secondary markets allows cash-out of returns within a short time. And since commodities and assets are less volatile investments, hedging solutions in cryptocurrency can be a less speculative investment compared to other digital assets.
Funding mining activities can also be a problem. A company can issue an asset-backed token with profit/revenue share models. Besides, the company can pledge the price, for example, to an ounce of gold against the token and sell during the fundraising at a discount. A business can also offer a trading platform for farmers to trade borderless, bankless through crypto, solving currency issues. The trading platform will also fight inflation while empowering agriculture and trade in emerging markets.
Are you looking for STO Solutions?
Tokenizer platform has strategically positioned itself to offer STO solutions, supporting businesses and investors with the issuing of asset-backed tokens (ABTs). We are a one-stop-solution for token economics, token creation and issuance, private sale fundraising, public sale fundraising, secondary market trading, and investing. Contact us today for all your security token offering needs.