What you should know about Commodity Linked Tokens

The inception of the first cryptocurrency, Bitcoin, in 2009 was met with much criticism. Many economics connoisseurs deemed it neither a commodity nor a currency. Since most global bankers and investors did not comprehend what crypto entails, they viewed it as a mere bubble that would soon burst, thus warning investors against staking their cash into the cryptocurrency venture.

Two decades later, most archetypal economics, banking, and investing mavens have shifted their opinions regarding virtual currencies. Cryptocurrencies, engineered through blockchain technology, have presented a new financial world full of transformative possibilities. One such sea change is the tokenization of commodities, which we will explore in detail in the unfolding paragraphs. 

What are commodity-linked tokens?

For a long time, the lack of stability in the value of cryptocurrencies presented a significant hindrance to their wide adoption. Over time, developers and investors turned the instability into opportunity by introducing commodity-linked tokens into the crypto space.

Suppose you are one of those investors who do not enjoy the adrenaline rush associated with the volatile value of mainstream cryptos such as Bitcoin. In that case, the commodity-linked tokens are your go-to option. These are cryptocurrencies whose values are anchored on traditional products or items such as gold, oil, silver, natural gas, and much more.

There is no limit on which commodity a token can be based on save for its advantage or disadvantage. Virtual currencies backed by-products are less volatile and enjoy more liquidity in the exchange market. 

The minimum investment has to equal the current market price of a commodity.

A quick glance at any Crypto / Commodities Trading platform will show that the value of any given commodity-backed cryptocurrency equals the prevailing rate of the traditional product or item. This means that the value of the digital coin cannot rise above or fall below that of the item on which it is based.

For instance, suppose you have invested in the DigixDAO token, whose value is backed by gold bars. If the costs of other cryptocurrencies are surging through the roof, but gold bars are doing poorly, DGX will sell at the prevailing rate of gold bars. 

Commodity-linked tokens have a built-in stop-loss.

The sole purpose of venturing into any investment opportunity is to accrue as much profit as possible while mitigating or avoiding losses. At the same time, as an investor, it is humanly impossible to proactively monitor how the commodity market performs at all times and daily. You could be tired, unwinding from fatigue on vacation, or committed to other personal engagements.

Consequently, you can leverage stop-loss orders to address short—or long-term fluctuations in the prices of commodity-linked tokens. You place a stop-loss order to buy or sell your commodity-based tokens when the price hits a specific target.

Commodity-linked tokens aim to address trust issues, inefficiencies, and complexity of transactions in commodity markets.

Since time immemorial, the commodity market has been marred with various challenges, such as trust issues, inefficiencies, and transaction difficulties. Commodity-based cryptos are powered by blockchain technology, which addresses most of the existing challenges in the commodity marketplaces.

For example, the decentralized nature of the blockchain, which involves multiple parties in verifying transactions, solves trust issues since no party can hold another at ransom. On a different note, the blockchain not only digitizes information but also automatically executes contracts through standardized procedures. This streamlines transaction, providing a systematic real-time process where settlements can be achieved. 

What you need to trade commodity-linked tokens

You may be wondering how you can lay your hands on commodity-linked tokens. The basic requirements that you need to trade commodity-based cryptos include:

• A wallet: Like fiat currencies, you need a secure wallet to store your commodity-based cryptos. This could be a hardware or software wallet. Hardware wallets are more reliable than software wallets.
• A mode of purchasing the tokens: If you do not have a mainstream cryptocurrency, such as Bitcoin or Ethereum, in your wallet, which you can trade for product-linked crypto, then you need a means to purchase the tokens. These include credit or debit card platforms, bank transfers, PayPal, and Skrill, among several other popular transaction platforms.
• A reputable exchange platform: Finally, consider a good exchange platform that will maximize investment value.