The current rise of inflation has made many investors look away from risky ventures such as cryptocurrencies, and look to safer investments such as commodities. These are not always easy for the small investor to get a foothold in though, but blockchain and the introduction of synthetic commodity assets could change this.
Abhishek Singh is the co-founder and CEO of Comdex, a decentralised synthetics protocol in Cosmos ecosystem. Comdex aims to provide users access to synthetic commodity assets, on-chain, which have inherent and tangible value. Users can gain exposure to a range of synthetic perpetual commodity contracts.
Speaking to The Fintech Times, Singh explains how small investors could establish themselves in the commodities market:
In the opening weeks of 2022, faint hopes that inflation would ease its upward course have been summarily dashed. One recent analysis from Goldman Sachs suggests that economic complications resulting from Omicron’s continued spread will likely tip off a worse-than-expected inflationary surge. The news isn’t good — or all that surprising — for investors already exhausted by last year’s record-breaking inflationary stint.
“Between wages and shelter, we haven’t seen the worst of inflation, even if energy prices moderate, even if supply chain issues start to resolve themselves,” Michael Strain, the American Enterprise Institute’s director of economic policy studies, told the Washington Post. “I still think we’re in for several months where prices are growing faster than what we’ve seen.”
The prospect of worsened inflation is a grim one; after all, no investor wants to see the value of their holdings erode under an inflationary tide. The watchword for the year may well become preservation as investors flock en masse to “safe haven” commodities that may stand a better chance of retaining their value.
The question is, will such investment opportunities be available once they arrive?
Commodity investment provides an inflation-resistant haven for (some) investors
Commodities (i.e, economic trade goods and resources such as oil, gold, coffee, etc.) are known for their capacity for retaining value through inflationary spikes. Unlike more speculative assets like cryptocurrency, commodities don’t offer the potential for sudden and spectacular gains; however, they don’t pose a risk for devastating loss, either.
Such assets are understandably attractive to inflation-wary investors who prioritise value stability over the faint hope of high profits. However, access to commodity investment opportunities is far from universal. Small-scale investors have historically struggled to enter the commodities investment market thanks to Byzantine investor qualification requirements, complex payment structures, and high illiquidity.
The first of the three is perhaps the most exclusionary — strict regulations around investor qualifications make the commodities market one of the most difficult for small investors to breach. Some might try to circumvent these restrictions by investing in the Bloomberg Commodity or S&P GSCI Commodity Index; however, these tactics don’t always afford access to the highest-potential asset types.
“Lithium, copper, tin—all of these electrification metals are going to have a big demand surge over coming years. These are not common in the indexes [….] these metals are underinvested.” Bobby Blue, a senior manager research analyst for Morningstar, told Barron’s in early January of this year.
Blue suggests that aspiring commodities investors can get a proverbial foot in the door by connecting with an actively-managed fund. However, such funds are relatively rare in the commodity sector, and some investors may not want to cede any of their strategic autonomy — or profits — to an active commodities manager.
Those who choose to do so, however, face other hurdles. Backed as they are by receivables, trade finance debt products cannot provide much liquidity before asset maturity. The sheer complexity of commodities’ underlying payment structures exacerbates this problem further, making it difficult for investors to liquidate their commodity investments on a short turnaround.
Given these exclusionary factors, many smaller, inflation-aware investors may feel as though they have no choice but to put their money into more speculative crypto assets that may, with luck, provide returns high enough to beat inflation. However, the inflationary protection such an approach offers is partial at best.
As Luke Lloyd, an investment strategist for Strategic Wealth Partners, summed up the matter for Forbes last year: “While Bitcoin and some other cryptocurrencies might eventually serve as an inflation hedge much like gold, due to their limited supply, the price of Bitcoin is influenced by too many other outside factors — like regulatory concerns, company adoption and governments creating their own digital assets — to be considered an inflation hedge right now.”
Investors seem to face an unenviable choice: either lose value to inflation or risk it in speculation. However, emerging blockchain technology may afford a third option: accessing “safe haven” commodity investment opportunities via synthetics.
Blockchain-facilitated commodities synthetic assets could provide inflation protection to historically excluded small investors
Synthetic assets put a blockchain spin on an economic idea that has persisted for centuries: derivatives.
Derivatives are financial contracts that source their value from an underlying benchmark; for commodity investors, assets such as oil, precious minerals, metals, or agricultural products could provide a baseline for valuation. These arrangements allow investors to assume a speculative position even if they don’t possess the underlying asset.
Synthetics, otherwise known as tokenised derivatives, apply this concept to the blockchain; every derivative receives a record on the blockchain and a corresponding cryptocurrency token. Like traditional derivatives, synthetics allow investors exposure to the price movement of commodity assets through the creation of collateralised debt positions (CDPs); investors do not need to own commodities to benefit from their value stability.
Synthetics solve every major accessibility problem small investors face when attempting to enter the exclusionary commodities sector. Through tokenised derivatives, investors can circumvent the eligibility restrictions and have more flexibility to leverage their investments; through synthetics, investors can provide liquidity, borrow, and speculate as they please. Synthetics will also solve fractional ownership of illiquid assets, as investors can access liquidity without the nuances of the real-world purchasing structures.
Synthetics provide an opportunity for financial stability amid continued inflation and economic uncertainty
Commodity synthetics can provide value to small investors who want to protect their fortunes from inflation’s rising tide — and, critically, the commodities market may be more likely to accept their investment amid 2022’s continued economic uncertainty.
Per a recent report published by the Asian Development Bank (ADB), rejection rates for trade finance soared to new heights during the pandemic. Over half (57 per cent) of surveyed banks and firms said that covid-29 had “worsened the shortage of trade finance support”, and 14 per cent of banks claimed that they “reduced capital availability to support trade”.
These funding gaps pose a significant problem for the commodities sector, which requires continual financing simply to meet its working capital requirements. In this context, synthetics don’t just pose an opportunity for small investors; they also provide a crucial alternative funding solution for the global commodities market.
2022 will prove to be a crucial trial period for synthetics. If investors and commodity enterprises successfully leverage tokenised derivatives, their collaboration could effectively democratise access to inflation-resistant commodity assets — and set the groundwork for a revolutionary bridge between DeFi and CeFi.