Effects Of Using Cryptocurrency As A Commodities Substitute

By Zack Lindsey

Raw materials are referred to as commodities, and they play an important role in the manufacture of a wide variety of other goods and services.

The cash market allows for the purchase and sale of many commodities. Futures contracts and other derivatives that are linked to the price of a commodity in the future offer another avenue for investors to speculate on the direction of commodity prices. Futures are a type of derivative that takes the form of a contract to trade a certain commodity at a later date.

Food and agricultural items such as coffee, wheat, cotton, and sugar are examples of popular commodities that are traded. Other popular commodities include precious metals such as gold and silver, energy products such as oil and natural gas, and precious metals such as gold and silver.

The values of commodities are very unpredictable, and trading them requires the exchange of vast amounts of items or complicated futures contracts. As a result, these markets are typically dominated by institutional investors.

Cryptocurrency as a Commodity

The regulation of the commodity markets is typically laxer than that of other markets. On the other hand, securities are governed by regulations about the transparency of their prices, increased requirements for reporting, and market abuse control. Due to the increased amount of labor required to ensure that a product is in conformity with legislation, the cost of supervising a security measure is typically substantially higher.

For this, several cryptocurrency industry executives, as well as aficionados, have advocated for the market to be classified as a commodities market rather than a market for securities in recent years.

Because cryptocurrencies have also arisen as a way to hold value or as a tool for speculation, many people believe that they are more comparable to commodities. Throughout history, many commodities, such as gold, have been put to use as a kind of value storage. In the meanwhile, both markets have attracted speculators, which are those who gamble on large fluctuations in prices in order to grab profits, as opposed to purchasing an item with the intention of holding onto it.

Example of cryptocurrency as a commodity

The majority of crypto commodities are tokens, which are used to get access to various online businesses. For instance, the Brave web browser comes with its own cryptocurrency already installed. This cryptocurrency may be used to pay for content development and ads. 2 There are a lot of cryptocurrency exchanges out there, and many of them have their very own digital tokens that can be used to pay trading charges and other platform-related costs.

Tokens that exist only in the digital realm can also be used to represent goods that exist in the physical world. The Digix Gold Token (DGX) is a kind of gold that can be traded digitally. Each token in the Digix Gold Token (DGX) ecosystem represents one gram of gold and is backed by gold bars stored in a safe location. On the other hand, in contrast to conventional gold, the tokens have no weight, can be readily divided, and are extremely difficult to steal. Additionally, there have been attempts made to tokenize essential commodities such as crude oil, power, and even bananas.

Cryptocurrency VS financial liability

Even though Bitcoin BTC/USD is a commodity, its creation and accumulation as a digital asset do not result in a corresponding financial liability for its producer. This is in contrast to the issuance of currency or financial securities, both of which invariably lead to the creation of a corresponding financial liability for the issuer. 

Cryptocurrency in terms of financial assets:

When a company creates new money or other types of financial assets, such as stocks, bonds, bank loans, or derivatives, it must simultaneously create a new liability for itself in the form of debt. Mining bitcoins, on the other hand, does not result in any responsibility of any kind. 

Bitcoin, in particular, ushers in a new possibility, and that is the presence of digital commodities, which in theory may be non-rivalrous both in ownership and use, but which could become rivalrous in both use and ownership by ways that are not governed by the law. 

The most important thing is that competition be kept up by tactics that are not illegal and without the participation of a third party that enforces monopoly rights. The blockchain of Bitcoin ensures that there is constant competition between users in terms of who may possess and use the same unit of Bitcoin at any given point in time. 

This exclusion of access is achieved without the need for any action by the state on the part of the legal system. Blockchain technology is able to restrict both the ownership of Bitcoins and the use of Bitcoins without resorting to any third party or legal apparatus because it effectively establishes private property rights over digital assets that, in principle, could be infinitely reproducible at zero marginal cost. This makes it possible for blockchain technology to control Bitcoins.

Particularly Bitcoin provides a new possibility: the creation of digital commodities, which in theory may be non-rivalrous both in possession and use, but which, through non-legal ways, could become rivalrous in both use and ownership. The fact that competition is sustained by tactics that are not illegal and without the intervention of a third party to enforce monopoly rights is of the utmost importance. 

A constant competition exists in terms of who may hold and use the same unit of Bitcoin at any given point in time, and the blockchain that underpins Bitcoin ensures that this rivalry is maintained. This exclusion of access is achieved without the interference of the state in any way, shape, or form. Blockchain technology is able to restrict both the ownership of Bitcoins and the use of Bitcoins without the need to resort to any third party or legal apparatus. This is accomplished by effectively instituting private property of digital assets, which, in principle, could be infinitely reproducible at zero marginal cost.

Risky Investment

They are the latest and greatest in the industry, and a good number of investors appear to be interested in them. To be sure, there will be those people who are interested in making this kind of high-risk investment, but there will be significant misgivings regarding cryptocurrencies, much alone making use of them as a means of oil hedging.

In addition to the fact that cryptocurrencies do not distribute dividends and involve an excessive amount of risk for investors, several nations have taken the obvious step of outlawing the usage of cryptocurrencies because there is no such central bank that regulates them.

In spite of the regulators' best efforts, they have not been successful in obtaining it. It has been demonstrated that cryptocurrencies are incapable of performing the same functions as fiat currency, which is a significant diversion of attention.

The analysis of Bitcoin pricing may, in general, learn a lot from the analysis of exhaustible resource commodities since Bitcoin has many of the same features as these other commodities based on resources that can be depleted, such as the fixed supply. On the other hand, although there is uncertainty around the short-run supply of gold and oil, there is no such uncertainty regarding the supply of bitcoin. As a result, the fluctuations in Bitcoin's price that have been seen may be understood to be the effects of shocks in Bitcoin's demand.

Final Words

The rise of the computer age and the widespread use of the internet have made it possible for capitalism to commodify digital goods on a previously unheard-of scale. With no need for government enforcement, private property is already institutionalized in the digital world, thanks to Bitcoin and blockchain technology. Automation in the digital realm also makes it possible to produce digital goods like crypto, NFTs, smart contracts, and virtual assets in met verses without using actual human labor. 

Therefore, a wider range of digital assets may be duplicated without the use of direct labor. Profits from their reproduction are transfers of value-added from productive activity taking place elsewhere in the global economy. A digital good may undoubtedly boost labor productivity in other productive endeavors, thereby raising the total value contributed. But because a digital good doesn't need any live labor, it won't create any new value-added. Thus, any gains from its replication are just reallocating already-existing value contributed.

Author's Bio:

Prior to his famous writing career, Zack was a tech-freak and got his relative degree from a renowned university in the USA. Right from childhood, he was interested in opening up toys and replacing their pieces of machinery. Zack received an award for best robot prototype in high school. Later, he merged his tech passion with his writing skills and began writing for different tech blogs. Also, he is a professional swimmer and loves diving into the colors of life.