Cryptocurrencies are not a secret in recent times and have become a worldwide phenomenon. Most of us have heard the term or perhaps anything related to the same. But, the term asset-backed cryptocurrency is a new concept which most crypto enthusiasts are yet to understand. The cryptocurrencies of the first generation have been accused of lacking intrinsic value. Due to this weakness, there are a number of people who are still skeptical about cryptocurrencies.
For example, the high unpredictability, as well as volatility of Bitcoin, make it an extremely risky medium of exchange for merchants and a poor store of wealth for the investors. But asset-backed cryptocurrencies are different from those of the first generation since they are characterized by security, liquidity, and stability. With these added benefits, these assets are very likely to overthrow their predecessors like Bitcoin and Ethereum in the time to come.
What is an Asset-Backed Cryptocurrency?
Asset-backed cryptocurrencies, as can be understood from the name, are crypto coins that are linked to an object carrying economic value. To state in other words, these cryptocurrencies are used for the purpose of digitizing an asset, and the record is stored on a blockchain. For example, a property is sold to a buyer, and this information is digitized instead of making use of traditional paperwork. Several records like the location of the property, deeds, and ownership history of the property are stored on the blockchain. Asset-backed cryptocurrencies exist on the top of a blockchain and are used for the purpose of transferring ownership to any individual who intends to buy the property.
How is Asset-Backed Cryptocurrency Different?
Let us understand the difference between first-generation cryptocurrency and asset-backed cryptocurrency.
- First of all, an asset-backed cryptocurrency is linked to tangible assets such as gold, fiat currencies, and real estate. Blockchain is the core of these currencies that offers a secure ledger along with providing complete transparency in the assets’ historical transactions as well as ownership. It is precisely the reason why these cryptocurrencies are ideally suited for the asset management industry.
- Secondly, the prices of asset-backed cryptocurrencies that are linked to physical assets are less volatile as compared to ordinary cryptocurrencies. Since these cryptocurrencies are backed by tangible assets, they also play a significant role in defining the mechanics that impact the swings in prices of cryptocurrencies.
- Asset-backed cryptocurrencies are attached to the external markets on which the asset they are linked to is traded. It is precisely the reason as to why the investors are still able to cash out the physical asset even if the value of tokens drops below the underpinned asset’s real value.
- Moreover, the crypto coins supported by systemized operations for managing assets will be highly tempting to not only mainstream investors but also institutional investors. Such systemized operations include clear, easily accessible as well as easy-to-understand valuations, verification channels, and outlined auditing procedures.
Advantages of Asset-Backed Cryptocurrency
Let us now understand the advantages of asset-backed cryptocurrencies.
- Offer Good Stability – We all know that the crypto market is extremely volatile in nature. The swings in prices of cryptocurrencies are unpredictable which results in discouraging several investors from investing in the market. But the asset-backed cryptocurrencies provide the investors with a good amount of stability in their prices. The investors thus have the chance to invest in digital currency without the need of dealing with the uncertainty of the changes in the market. In addition to this, investors can very easily and conveniently move from an asset-backed cryptocurrency to other cryptocurrencies without the need of having to pull their money out from the crypto market.
- Very Easy Tokenization of Any Asset – With the help of these cryptocurrencies any asset can be easily tokenized, not just real estate and minerals. Any of the assets that carry a value can back a crypto token with ease and convenience. Some assets that can be tokenized are equities, intellectual property, product merchandise, venture capital, commodities, and a number of others. Asset-backed cryptocurrencies are all set to bring about trillions of dollars of investment to the crypto market.
- Adoption is Easy – Cryptocurrencies like Bitcoin and Ethereum are invisible as well as intangible. At the same time, they lack intrinsic value since they are not supported by any real-world asset. Due to this, a majority of the population considers cryptocurrencies to be worthless. But on the other hand, asset-backed cryptocurrencies offer an appropriate middle ground to guide the new users into the crypto sphere. Since these crypto tokens are backed by tangible assets, they are quite easier to understand and adopt. Non-supporters of cryptocurrencies are much more likely to believe in a cryptocurrency that is backed by something that is tangible. Cryptocurrencies backed with assets like real estate, minerals, etc. could easily solve the problem of mass adoption that has been crippling the crypto industry.
- Highly Divisible in Nature – The excessive minimum amount of investment in high-priced real estate excludes the average investors from such opportunities. But with the help of cryptocurrencies, the entire real estate can be subdivided into smaller portions that prove to be more cost-effective. An average investor with only a hundred dollars would be able to invest in a property valued at one million dollars by purchasing a token worth 0.0001 shares which otherwise would have been like an investment that is out of reach. Crypto thus gives every investor regardless of their size of investment an opportunity to have a share in the profit.
Challenges of Asset-Backed Cryptocurrency
Although an asset-backed cryptocurrency is backed by tangible assets, there are a few challenges that it needs to overcome.
- Regulatory Issues – No sufficient regulation is present in the fields of asset-backed cryptocurrency, tokenization, and cryptocurrency. This, in turn, introduces a high amount of risk for the investors as well as customers.
- Property Rights’ Legal Enforceability – There is a lack of clarity regarding the ownership. Investors are still confused about whether owning the asset-backed cryptocurrencies grants the ownership of the corresponding asset or not. It is not entirely clear as to who is answerable for a non-existent asset and how the owner would be able to recover damages if any.
- Technical Infrastructure – The standards of safety, as well as security, have to be improved to make sure that the asset-backed cryptocurrencies are actually linked with real-world assets.
Future of Asset-Backed Cryptocurrency
Asset-backed cryptocurrency is still an emerging concept and it would take quite a few years of time to be readily implemented. Overcoming the existing challenges can lead to a further increase in their usage. Asset-backed cryptocurrency would undoubtedly be the getaway to a wider range of applications as the crypto market continues to grow, mature, and evolve in the time to come. Crypto enthusiasts expect that the capital locked up in traditional assets will slowly and steadily trickle into the crypto sphere via asset-based cryptocurrencies.