How to hedge against instability with real world-backed tokens
While cash-based savings and equity-based investments are both prone to volatility, tokenization creates a new investment opportunity that is truly stable.
Investment decisions today are primarily based on the investor’s appetite for risk, mixed with a bit of research or advice and, hopefully, a positive gut feeling. After all, the whole point of investing in equity, and now also cryptocurrencies, is that they can be liquidated, sooner or later, for a profit. Today, investing like this is typically seen as a more productive way of saving or “growing” your wealth over a long period of time. But this was not always the case.
In the old days, or even still in more traditional settings, people would approach the idea of savings by putting extra money aside each month in a bank account, or under the bed, for bad times and rainy days. Investing in the stock market was typically something that was perhaps only a small part of one’s savings, if at all, but never the majority of it. Savings has long been predominantly cash-based, or in the form of precious metals like gold.
Today, however, having cash means to be constantly losing money. If it’s not inflation in countries like Argentina, then it’s the negative interest rates in countries like Switzerland. Cash is by definition unlikely to appreciate in value, which is why investing in the stock market, or even risky assets, has become a no-brainer for long-term financial growth.
However, investing is hardly a fool-proof plan for wealth creation, as it has its own set of problems. Equity is not liquid, and at some point, you’ll need cash again, because the supermarket, the landlord, the power company, etc. all want to be paid in cash.
Then there’s the constant boom-bust cycle of the stock market, a game of guessing, predictions, reactions, and a looming black Friday. Perhaps you have some unproductive assets, which you liquidate eventually, but then come to regret that decision once the stock prices climb again. This happens all the time. While the stock market may seem at first glance to be rather predictable, it’s anything but.
Real world-backed assets: the third option for a hedge
So, with cash-based savings, you have to fight inflation, and with equity-based long-term investments, you have to deal with volatility. In both cases, your long-term financial growth is hampered by instability. Tokenization, on the other hand, offers a third option. One of the many tokens that can be issued are revenue-share certificates. At first glance, these might seem a bit like stocks.
By buying a revenue-share token from a stable and reliable industry like agribusiness (eg. cattle, soybeans, or corn) you obtain a certificate for a share of the operation’s revenue. This might not yield a lot in terms of dividends, but it is a safe and un-speculative investment and can act as a hedge against inflation. Revenue-share tokens are all about stability, promising small but steady returns.
One of the upsides of using tokens to invest in real-world assets like agribusiness is that returns are based on the value of its products, which are universally in demand. The value of food can never go to zero. It is needed constantly. Even if the whole FinTech industry began to suffer, or the crypto boom came to an end, the food industry would still prevail. People need to eat, that’s a simple fact of life. Sure, there are risks like drought, hurricanes, or locusts, but they will not occur at the same time everywhere on earth, so your risks are relatively contained with simple diversification.
Tokenization solves both the volatility and liquidity issues inherent in cash and stock-based saving plans. It allows you to convert money into real physical values, like cattle, which are comparatively stable. These coins, if convertible back into fiat money, can truly be called “stablecoins” — stable by value, not by denomination. The term stablecoin usually refers to a token that is pegged to a fiat currency, like the dollar, but of course, this means that it has exactly the same problems with inflation that plain old dollar bill has too, so it’s a bit of a meaningless term. Not so if the token is pegged to a stable physical value.
This is a revolutionary addition to one’s financial arsenal, especially for those in countries with unstable currencies or untrustworthy economies. In these places, many are forced to buy physical assets because the currency is constantly losing value. Here, using tokens to own stable values might be the best possible alternative. And by simply converting the token back into fiat money means you can liquidate it at any point and pay your bills. The fundamental issues of stability and liquidity lacking in cash and stocks are solved for those looking into long-term-saving options.
In countries like Argentina, farmers are grappling with a plummeting peso amidst pandemic uncertainties, where net currency reserves are near zero and inflation risks reaching 40%. Tokenized agricultural assets offer farmers the ability to seek a hedge against inflation and access liquidity via certified financial titles, accessible by both national and international investors.
Agricultural-backed tokens have become a critical solution to helping developing countries generate more investment and export opportunities across a range of agricultural industries.
But all this is, of course, only possible if there is enough liquidity. Assuming the devaluation of our global fiat currencies keeps its pace, there will soon be sufficient demand for such a solution, beyond the current niche users. Fortunately for those who prioritize stability, speculation does not work well with these kinds of tokens, because there is not much room for gigantic profits.
Agribusiness is a pretty constant area, which will not have a major uptick in revenues, unless something unusual happens like a farmer hitting oil. And because it’s pegged to a stable physical good with constant demand, “pump-and-dump” schemes won’t work, even if someone was silly enough to try.
Tokenization has yet another trick up its sleeve that makes it perfect for individuals and small companies, particularly in unstable economies. Because the regulatory and administrative requirements for a revenue-share token are not the same as with equity, this means that you can tokenize small assets as well and make a bit of value off of them. Combine that with tokenizations ability to ‘fractionalize’ a physical whole, it means that you can have multiple claims on an otherwise indivisible asset.
At the moment, both of the existing savings options open to people, cash and equity, are risky and unproductive. As global economic instability increases in the aftermath of this pandemic, and as the need for financial stability increases around the world, investment into one of the few stable options, like agribusiness, might just be a better alternative to cash, and is certainly a much better alternative to any other speculative investment.
Guest post by Johannes Schweifer from CoreLedger
Johannes Schweifer is the CEO of CoreLedger, a company empowering businesses of all sizes to access the benefits of blockchain technology. Schweifer co-founded several blockchain start-ups including Bitcoin Suisse. He’s a passionate problem-solver, holding a Master’s degree in Chemistry and Ph.D. in Distributed Computing and Quantum Chemistry.More about Johannes Schweifer