What makes an asset-backed cryptocurrency different?
Since Bitcoin exploded and mainstreamed the concept of cryptocurrencies to a vastly wider audience, the defining theme of virtually all crypto tokens has been their extreme and seemingly inherent volatility.
The swings have been polarizing; Bitcoin now trades at $6,277 per coin, less than a third of the valuation it held just last December, according to Coin Market Cap. The thus far untameable market instability has had the effect of spooking away potential investors leery of getting caught in a crash, and that fear has in turn limited the size, scope, and societal utility of the entire cryptocurrency market. This market maturation has lowered almost everyone’s tolerance for risk.
What can be done?
One development that appears particularly promising is the evolution of next-generation tokens underpinned by real, tangible assets such as real estate, gold, or fiat (cash). In many ways, this is the most natural of evolutions; as Hogi Hyun has highlighted, the “…blockchain is at its heart a secure ledger, a form of accounting and reporting that offers clear visibility of historical ownership and transactions. As such, it is ideally suited for the asset management industry”.
While there is great variation in how asset-backed cryptocurrencies are structured, they share a unifying core in being hitched to an element of real value that can be cashed out and retained, negating the central flaw of their first-generation predecessors like Ripple, or ethereum .
Being linked to a physical asset provides more than just the security of less dramatic price swings compared to older coins; it also helps define the mechanics of how those swings occur. Because most asset-backed coins are tied to external markets on which those assets are traded - think commodities like diamonds or silver - if the value of the token tethered to them falls below the real assets value, then investors will capitalize on the discrepancy and cash out the physical asset. This awareness acts as a built-in safeguard to prevent excessive speculation.
Just how the underlying asset of the token is managed and protected in this process it will continue to be of paramount importance. Institutional and mainstream investors will be drawn to those coins supported by systemized operations for overseeing and divesting assets. This means things like verification channels, outlined auditing procedures, and valuations that are both clear and accessible enough to be broadly understood. The central advantage provided by asset-backed tokens is their reliability. As such that status needs to be continuously reinforced and emphasized.
While asset-backed tokens are still finding their feet, especially in terms of broadening the public’s awareness of their existence, we can see already see their utility to investors through their daily trading volume as a percentage of their overall market capitalization. While it has remained mired in controversy, the token Tether has nonetheless traded far more frequently relative to its market capitalization than larger tokens like Bitcoin.
As the cryptocurrency market continues to evolve, grow, and mature, asset-backed tokens will be the gateway to a wider application. The key to understand is that the asset itself is just one part of the story; how that asset is managed, and the confidence prospective investors have in the quality of that management, is just as important. Asset-backed tokens draw elements of the security that more established markets offer, without losing their organizing principles as cryptocurrencies, lowering speculative volatility.