Cryptocurrencies remain the most volatile but also the most attractive investment instruments. At the moment, a single move by regulators could turn the cryptocurrency market into a “bloodbath,” so most investors regard them as high-risk assets. Today, however, there are already ways to invest in these markets backed by real assets. Tokens backed by such assets give you the benefits of cryptocurrencies, such as low transaction costs and transparency, while providing the security of a physical asset.
The first asset-backed tokens have already appeared. They are tied to fiat currencies (e.g., Tether, tied to the U.S. dollar), precious metals (e.g., Digix), highly liquid stocks (Apple, Facebook and other similar companies). The market capitalization of real asset-backed cryptocurrencies could exceed $4 trillion by 2025, and as the market develops, they could take up to 80% of the total cryptocurrency market capitalization.
Volatility as a given in cryptocurrency markets
Investing in cryptocurrencies is not for the faint of heart because they are one of the most volatile assets in the world today. The heights reached are followed by grandiose drops in just a few days. For example, the rate of Bitcoin can change by more than a thousand dollars in just a few days. At the same time, Bitcoin today is one of the most stable cryptocurrencies on the market. Of course, this (along with tighter regulation of the blockchain industry) scares off conservative investors.
Regulation on the way
Not long ago, cryptocurrencies dropped significantly due to new regulations issued by the Chinese government banning ICOs and requiring an immediate halt to any fundraising activity through the issuance of new tokens. The directive did not mention the largest cryptocurrencies, but their exchange rates immediately shook: for example, Ethereum, which is most closely associated with the ICO boom, dropped 12%, and Bitcoin lost 7%.
Chinese regulation is one of the biggest problems hindering the development of the digital token sale market, but it was not the first to bring down the market. In early August, the U.S. Securities and Exchange Commission officially confirmed that it was drafting new legislation for cryptocurrency ICOs. Singapore also joined in, saying that in the near future, tokens issued in ICOs could be officially recognized as securities.
Obviously, regulators are trying to help investors not to lose their money on fraudulent projects. But can they go too far and stop the development of the young crypto-economy?
Still a very attractive investment
While volatility and increased regulation may be too much of a deterrent, returns on digital assets remain very attractive to investors. There is no other similar asset type in the world that has delivered this kind of growth. To give you an idea, Bitcoin was only $970 at the beginning of 2017, while Etherium was around $8.
Of course, historical returns are not a guarantee of the same returns in the future, but we estimate that cryptocurrencies should reach $5 trillion in capitalization by 2025, when their penetration into society will reach 5% of the global population. Compared to some market projections, this is a fairly conservative estimate. For example, Peter Smith, CEO of Blockchain.info, and Jeremy Lew, Snapchat’s first investor, argue that the market capitalization of Bitcoin alone will exceed $10 trillion by 2025.
With such prospects, few would want to go back to fiat money. And today there is already a way to hedge investments in cryptocurrency with real assets. Raising asset-backed cryptocurrencies allows you to kill two birds with one stone by getting the security of a physical asset and the convenience of cryptocurrency.
Asset-backed tokens will be the backbone of industry growth
The value of asset-backed cryptocurrencies is tied to real assets such as stocks, commodities, or fiat money. There are historical analogues, whose example will give you a better grasp of the idea. Hundreds of years ago, you could leave a certain amount of gold with a jeweler and receive a promissory note from him. These receipts were then passed from person to person, and any owner of such a receipt could go back to the goldsmith and demand the gold back.
Asset-backed cryptocurrencies are the digital equivalent of these receipts. They are a demand for the issuance of the underlying assets that is transferred from person to person – with each such transaction reflected on the blockchain. They have all the advantages of cryptocurrencies – low transaction costs, security, exchange without the need to trust the other party, and the ability to create smart contracts. At the same time, they are a good savings vehicle because their volatility is low and they are generally more predictable and less risky. Regulators should like these assets because of the valuable collateral behind them.
As we said at the beginning of this article, the first asset-backed tokens have already emerged and are successfully developing. We believe the market capitalization of such tokens will grow to $4 trillion by 2025, accounting for up to 80 percent of the total cryptocurrency market capitalization. The proliferation of platforms that allow “tokenization” of assets could significantly reduce the cost of creating asset-backed tokens and allow cryptocurrency holders to optimize and diversify their investment portfolios.