Asset-backed cryptocurrency is a token that is linked to a tangible object with economic value. These objects include fiat currency, precious metals, and real estate. Essentially, this crypto is used for digitizing an asset, and then the record gets stored on a blockchain. A blockchain is a growing list of blocks or records that are linked through cryptography. In other words, a blockchain is a secure ledger that provides transparent visibility of historical transactions and ownership.
Due to the fact that asset-backed cryptos are linked to physical assets, they are historically less volatile than ordinary cryptocurrency. The backing of tangible assets helps to define the reasons behind cryptocurrency price swings. Additionally, if the value of the coin drops below the asset’s real value, you can still cash out your physical asset.
For these reasons, asset-backed currency is a good investment, but before you dive in, there are some things you should know:
- Types of Asset-Back Cryptocurrencies
There are several different asset-backed cryptos that you can invest in, but the most popular are stable coins. Stablecoins are intended to reduce cryptocurrency volatility by being attached to fiat money or exchange-traded commodities like industrial or precious metals. For example, gold-backed cryptocurrency is a stablecoin.The price of this digital currency is tied to the value of real-world gold. The gold is stored by a trusted third-party, and a digital exchange is used for trading the gold. The advantage of this is that tokenized gold is more straightforward to trace than physical gold. Furthermore, tokenization provides liquidity, allowing it to be easily redeemed in digital exchanges. Additionally, if a stable coin price decreases, you can still get the reserve of fiat currency. For instance, if you were to buy rhodium backed stable coin, such as RhodiumCoin, and the price of the coin decreased, you would still have the value of the rhodium to fall back on.
- Oil-Backed Cryptocurrency
This currency is called ‘Petro’ and is underpinned by the oil reserves in Venezuela. It was used to solve Venezuela’s problem with hyperinflation and is backed by the government. One Petro is equal to one barrel of oil. As a result, it is less volatile than cryptocurrencies, not based on tangible assets. It is also the first cryptocurrency to be backed by both an asset and a government.
- Mass Adoption
A major benefit of asset-backed cryptocurrencies is that they are more likely to see mass adoption than other cryptos. This is because cryptos like Bitcoin are invisible and intangible. Asset-backed cryptos, by contrast, have tangible assets backing them up and are therefore easier for the general public to understand.
- Any Asset Can be Tokenized
Another benefit of this type of cryptocurrency is that any asset can be tokenized. Anything with a value can back a crypto token. For instance, something like Palladium Coin seems uncommon, but it does exist. Other assets that can be tokenized include commodities, product merchandise, venture capital, intellectual property, and equities. As a result, asset-backed cryptocurrency is predicted to bring in trillions of dollars to the cryptocurrency market.
- Regulation and Legality
A risk to potential investors of asset-backed cryptocurrency is the lack of regulation. There is not enough regulation in this field; therefore, price is determined by supply and demand. Furthermore, there’s a lack of clarity about whether owning tokens gives you ownership over the corresponding asset. This poses a risk as it’s not clear who is responsible for the non-existent asset and how an owner can recover damages.
Asset-backed cryptocurrencies represent a way into the cryptocurrency market that is stable and liquid. When you are considering whether to invest in this type of crypto, it’s important to keep in mind that there are several types of asset-backed cryptocurrencies to choose from, each with their own merits. Additionally, there are the benefits of easier mass adoption and the ability to tokenize various assets, widening investment possibilities. However, it’s good to keep in mind that this cryptocurrency lacks regulation and legal clarification, so there is some risk. That being said, asset-backed cryptocurrencies will provide a gateway to a broader application for cryptocurrency as the market grows, matures, and evolves.