What is Real Value?

When talking about cryptocurrencies some people can’t get their mind around how digital currencies can have a real value. Nothing tangible backs them. These cryptosceptics may be the same people who once spent their pocket money on Pokemon cards. Or more curiously, collectable phone cards. But at least with these you had something physical as evidence of your likely ill-fated investment. Moreover, there are some rare cards which attract a huge premium. This is despite being nothing more than mostly useless pieces of plastic.

When it comes to money, however, we think differently. The physical presence in our wallets of paper cash and coins is reassuring . So is a healthy balance in our bank accounts. This is despite the fact that the US abandoned the gold standard in 1971, and many other countries did so well before then.

So in effect the notes and the coins may be beautiful and very useful, but they are not backed by anything much. Arguably in themselves they are really not that different to Pokemon cards or phone cards.

Hope for the Cryptosceptic

For the cryptosceptic looking to invest there is a solution. Right now, there is a trend to tokenize traditionally valuable, real-world assets such as gold, diamonds and property. Tokenization is the process of converting rights to an asset into a digital token on a blockchain. Its forerunner from the pre-digital world is securitisation. Here, they accumulate certain types of assets so that they can be repackaged into interest-bearing securities.

Non-physical assets such as intellectual property and trademarks are certainly easier to tokenize. However, the advent of digital blockchain-based systems makes it far easier to tokenize tangible assets. This includes gold and other precious metals, diamonds and real estate. I am guessing it won’t be long before we see tokenization of rare coins, postage stamps and art. Maybe even expensive wine.

Tokenizing Commodities

In 2017 the price of bitcoin reached parity with an ounce of gold. This grabbed the attention of gold investors around the world. Now there are loads of gold-backed cryptocurrencies.

Thanks to blockchain technology providing a secure accounting method, and with Bitcoin becoming better known to the general public, there is a proverbial (and literal) gold rush happening now in the crypto world, and even countries are looking to issue their own gold-based cryptocurrency.

Along very similar lines Tiberius Coin is a cryptocurrency token backed by seven precious metals. It tethers the asset price to that of the price of aluminium, copper, nickel, tin, gold, cobalt, and platinum.

But of all assets, diamonds are perhaps the one that can benefit most from the advantages of tokenization. Cedex is the first project to make diamond tokenization a reality with their blockchain-based diamond exchange. Diamonds are a good application for blockchain technology. The diamond market has a lack of transparency, lack of standardisation, and lack of liquidity that prevent them from being accessible to the public.

How Does Tokenization of Commodities Work?

A company issues a token or coin that represents a value of the commodity (for example 1 gram of gold equals 1 coin). They store the commodity securely and it can be traded with other coin holders.

At a minimum the price of the coin will always equal the current price of the commodity unit. If the cryptocurrency becomes popular then the price of the coin can potentially increase in value, greater than the value of the commodity unit. If the cryptocurrency doesn’t take off the value remains as the underlying commodity unit price. It’s like a built-in stop-loss.

Scams aside, the only real risk is the physical handling security of the commodity unit. While the blockchain accounts for the coins, it is another matter to account for the physical stored commodity. When evaluating such tokens look for who actually owns the commodity, how it is purchased and how it is stored.

Tokenizing Real Estate

Real Estate tokenization feels and smells like old-fashioned securitisation. Globally, real estate is the largest asset class in the world and it is valued at well over $200 trillion.

Tokenized real estate ownership gives people the ability to invest small sums of money into valuable properties that they wouldn’t be able to afford in their entirety.  Furthermore, this partial ownership can be far more passive than typical real estate ownership, as it doesn’t include any time commitment for property upkeep or management.

One such project, Atlant is a platform that aims to make passive income from real estate ownership feasible for investors without the deep pockets that are typically necessary to be a player in the real estate game.

Playing Monopoly with a silver cryptocoin as a token

Exciting times

The exciting thing about these developments is that Blockchain technology is unlocking multitrillion-dollar investment markets to the general public. These are markets which were previously only accessible to large investment funds or the wealthy. Passive income through tokenized real estate ownership could be life-changing for many people. So could having the ability to spread their long-term investments across many asset classes.

All of these initiatives use the ethereum blockchain and have tokens.  Soon we will be launching our new Blockchain Xplorer which will include the ability to view and analyse token transactions.  As a potential investor you could use the explorer to see how active their token is, i.e. check on the activity and underlying health of their token / markets.

Now I’m off to see if I can swap my old phone cards for some diamonds. Now that would be a good exchange.


Also published on Medium.