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Tokenizing commodities: it’s possible, but should we?

The commodities market plays a central role in the global economy as large corporations and governments trade raw materials such as gold, coffee beans, oil, energy, sugar, grains, etc. which are transported worldwide by land, sea and air. Part of the financial network that makes trade on such a scale possible are the trading platforms constantly abuzz with moving real-time prices in response to global demand, supply, political developments and currency rates.

As an indicator of the broader health of the world economy, the fluctuating prices are closely watched not only by those who have a direct relation to the trade but by bankers, politicians, corporations and anyone else interested in the economy. What happens in the commodities market matters, simply because it affects almost every other market.

But the age-old and well-established market is ripe for a massive upgrade that will change the way people all over the world issue, buy and sell commodities.

The tokenization of the commodities market

With the technology underlying cryptocurrencies, we are now able to tokenize commodities. At its simplest level, tokenization refers to the digitization of real tradeable assets stored on a blockchain which can then be traced, moved and traded much more easily. The token itself has no intrinsic value, but as a representation of another real-world commodity it derives value from the underlying asset. Similar to say a stablecoin pegged to another currency, a commodities token is pegged to the price of a commodity such as gold, silver or coffee beans.

There is already a lot happening in the crypto space, with many companies chasing the opportunities that exist when we combine blockchain, crypto and the global trade of commodities. Companies such as Emirex, Bitcoin Middle East Exchange, OpenFinance, Long Term Stock Exchange and Vertalo are all competing with each other in a bid to offer a comprehensive selection of tokenized assets available for trading on dedicated crypto exchanges.

The big opportunity of a tokenized commodity market

There are many reasons for tokenizing commodities, which benefit both existing players in the industry as well democratize access for retail investors – drastically increasing the total addressable market.

Fractional ownership

Tokens can be broken down into smaller units, which means you can own a fraction of an asset rather than owning it in its entirety. The same way you don’t need to buy 1 whole Bitcoin, the ability to buy say 0.8% of a barrel of oil or a few grams of gold instead of a full bar will give many more retail investors access to this market. There would no longer be a barrier to entry for people to participate in the global trade of commodities.

Liquidity

Besides benefitting investors, it actually helps the commodity markets too as it increases market efficiency and liquidity. As more people actively trade, greater liquidity and market depth tightens the spread offering all participants easier and fairer price discovery.

Cost reduction & simpler process

Traditional legacy systems are typically fraught with inefficiencies, and the commodities market is no different. This industry is riddled with intermediaries ready to take a fee every step of the way as you enter the process of buying and selling commodities. The entire experience is much more streamlined when you are able to buy tokenized commodities on a crypto exchange. You would trade gold, wheat, or sugar via tokens the same way you already buy ETH, BTC or LTC for example.

24/7 crypto trading

Global financial markets are massive and borderless, but they also have downtime outside operating hours. Crypto markets never sleep. You can trade any cryptocurrency any time of the day – sure there are slower hours and busier hours, but the crypto market is always open for business.

Through tokenization, commodities would be available for trade against conventional cryptocurrencies on a 24/7 basis which presents opportunities that are usually not available on traditional markets.

Yes, we can. But should we?

With sophisticated application of blockchain technology and cryptocurrencies, we could pretty much tokenize anything that exists in the world. Paintings, fine wine, rare antiques, collection items and so forth can all be represented by a token, ready for trade on a crypto exchange. The question is, should we? For commodities, the answer is yes.

By tokenizing commodities, more people have access to the global trade in a way that serves a broader range of wealth. Because of this, there will be more activity on the markets which creates greater liquidity and market depth with better price discovery. The commodities market would not only be more efficient, but for the first time in its long history it would be open every single hour of every day.

Both traders as well as the industry stand to benefit greatly from tokenized commodities available on crypto exchanges.

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