As you become entangled in the wide world of cryptocurrency exchanges, it can be a confusing space. There are many terms from the traditional investing arena that crossover, though may have different meanings.
A cryptocurrency, also abbreviated often as just “crypto” for short, is a digital asset. It can be a representation of a real-world asset, such as a token standing in for a piece of real estate, or it can simply be a made-up form of value.
There are countless cryptocurrencies on the market today. They are well known for their volatility, often making someone rich in one moment, and poor in the next. Unlike the more traditional forms of investing such as the New York Stock Exchange, the world of crypto is a fast-paced and ever-changing Wild West of assets.
It can be hard to keep up with all of the comings and goings, but let’s take a deeper dive into crypto and specifically what a crypto commodity means.
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Cryptocurrency
Cryptocurrency can take many forms. There are also many names for the tokens themselves. Think of the names much like abbreviated stocks. For example, Apple Inc. is a popular stock. Its stock abbreviations for the purpose of the NASDAQ are AAPL.
Likewise, different cryptocurrencies have different shorthand versions of their names when it comes to trading. Crypto was designed first and foremost to be a digital transaction. All funds are exchanged online via websites and the Internet.
Cryptocurrency Exchanges
The websites those seeking to purchase crypto on are platforms designed for such exchange. For example, let’s take a look at the Ethereum network. On Ethereum, a blockchain-based platform, users must make transactions first by purchasing Ether, the native currency on the blockchain itself.
Ether, abbreviated ETH, is the crypto required to do business on that specific blockchain. While it can be bought, sold, or traded on many cryptocurrency exchanges, it is specifically “used” for business on Ethereum.
Think of the exchange much like a currency exchange service. If you live in the United Kingdom and operated your daily business in pounds, you will need to change pounds into American dollars if you travel to the United States. The US Dollar is the native coin of that country. They do not accept pounds for purchases in cash.
These native currencies, also called fiat currencies, are those backed by a government. In the case of crypto, however, such backing is nonexistent.
No Central Authority
The main pillar of the blockchain-based platforms of today rests upon this very concept: no central authority. No bank nor government owns the blockchain. It is not something overseen by a corporation or an individual.
Instead, the technology behind crypto, as well as the actual crypto itself, operates on a peer-to-peer network. No central power controls the blockchain (or crypto), and no entity is backing the funds.
Instead, it is simply the belief of the users that this currency has any value. Which, after all, is what most money truly is at the core. The US Dollar for example is simply a piece of green paper. If the government did not back it, stating it had value, a concept accepted by its citizens, then the paper would be just that: paper.
Instead, because the people have a faith in that government and choose to believe the currency has value, it is an accepted form of payment for goods and services. Likewise, users on a blockchain-based platform decide on a native currency and accept that currency for an item of value. It is also used for whatever goods or services the users of the blockchain deem it to be worth.
Depending on its availability or demand (think back to high school economics), the value can fluctuate. Unlike fiat currency, however, cryptocurrency tends to range from very highs to very low lows, and all in the blink of an eye.
While the value of the dollar, for example, can slightly vary from month to month, it typically hovers in a set amount that is not often changed except in times of war or major economic difficulties.
Blockchain Technology
As previously noted, the concept of cryptocurrency relies on the blockchain. This tech allows the process to exist.
Blockchains are blocks of data, immutable and secure, that are then linked together in a chain-like series. This data acts as a sort of public ledger. It is a recording of all transactions made on the platform. In other words, all of the crypto’s comings or goings are logged into the designated blockchain on which it exists.
Blocks themselves are created and open for view by the users on the blockchain. The peer-to-peer aspect of the tech allows the blocks to be immutable once created. In other words, no changes can be made once a block is created.
This tech can be good and can be bad, as the inability to make changes (say for example should a bug be found) can limit updates or fixes to problems. However, the plus is this creates a level of security and transparency that is unmatched.
Similarly, the debate over the immense computing power and energy required to create such blocks is an often argued and valid point. The existence of crypto, in general, is impacted in the global economy because of its green effects.
What Is a Commodity?
Now that you have a baseline understanding of what cryptocurrency is and how it works, it is crucial to define the other half of the phrase. What is a commodity?
In terms of the trading world of investors, commodities are basic goods used in commerce. These goods are interchangeable with other goods of the same type.
Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.
For example, gold is a commodity. One gold bar is equal in value to another of the same size and weight.
To be sure the quality is matched, specifications are required. When they are traded on an exchange, for example, commodities must meet specified minimum standards, also known as a “basis grade.”
Examples of Commodities
Some of the popular commodities traded in today’s market include products such as:
- Oil
- Gold
- Silver
- Beef
- Grains
- Natural Gas
- Sugar
- Coal
and so forth. The main theme is that one product can be interchangeable with another of the same size/value. For example, one barrel of oil is just like another, no matter who the producer of the oil was.
Products that are not commodities, for example, electronics, cannot be traded in the same way. One brand of television, for example, may differ greatly from name brand to name brand. Even within a brand, quality may vary, such as in the case of the ever-popular iPhone. Depending on its generation, features vary greatly from year to year.
Other commodities that have come into play can include things like cell phone minutes or bandwidth of the Internet. These “energy markets” join the likes of preexisting modes such as coal and oil, used for utility purposes.
How Commodities Are Purchased
Investors and traders can buy and sell commodities directly in the spot, known as a cash market, or may do so via derivatives such as “futures” and “options.”
The purchase of commodities breaks down into two categories: transactions between buyers and producers, and speculators.
Commodity Trading Futures
The sale and purchase of commodities are most typically carried out through a process known as “futures contracts,” which take place on exchanges that standardize the quantity and enforce the minimum quality of the commodity being traded.
For example, the Chicago Board of Trade (CBOT) is one such exchange that stipulates that “one wheat contract” is the equivalent of 5,000 bushels. CBOT also states what grades of wheat can be used to satisfy the contract (i.e. quality of the product).
Within the Futures process, there are two more subcategories, as there are two types of traders involved in the futures market.
Futures Buyers and Producers
The first category of purchases is made by buyers and producers of commodities using commodity futures contracts for the “hedging purposes” for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires.
For example, let’s take that same 5,000 bushels of wheat. If a wheat farmer locks into a contract with a buyer of wheat to take this year’s crop yield at $X, that price is locked in. This is done in case the price of wheat should fall before the actual harvest time, benefiting the farmer.
That farmer can sell wheat futures contracts when the crop is planted so that he can guarantee a predetermined price at which to sell the product (for the wheat) at the time it is harvested.
Commodities Speculators
The second type of commodities trader is “the speculator.” These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price changes. These traders never intend to make or take delivery of the actual commodity when the futures contract expires.
For example, if you were a speculator for the aforementioned wheat farmer’s commodity, you are not actually interested in the wheat itself, nor likely the farmer. Instead, you are using the ups and downs of that commodity’s value to make money.
Many of the futures markets are very liquid and have a high degree of daily range and volatility, making them very tempting markets for intraday traders. These investors work to figure out the future value of a commodity, or what it is expected to do in the future, in order to buy or sell at profitable times. (Hence, the naming of speculators, as they are guessing that their chosen way to invest will pan out into a financial gain.)
Why Buy Commodities
Commodities are often recommended to investors as a way to fight inflation. Changes in the marketplace are common, and stocks will rise and fall in value on a daily. However, the stability of the commodities trading gives investors in some products the safety of knowing their funds are backed.
Many of the index futures are used by brokerages and portfolio managers, also, to offset risks in other spaces. Since commodities do not typically trade in tandem with equity and bond markets, some commodities can be used effectively to diversify an investment portfolio.
In other words, purchasing commodities in a long-term sense as part of a long-range investment plan can offer a safe haven for some.
Crypto + Commodity
The term crypto commodity can now be better understood, having explained a foundation of the more traditional investment terms, along with the newly developed ins and outs of crypto. Crypto commodity is a term, in its simplest definition, used to describe a tradable or fungible asset that may represent a commodity, utility, or a contract in the real- or virtual world through exclusive tokens on a blockchain network.
Tokens in Crypto
Crypto commodity is a concept that revolves around tokens. A token, boiled down, is simply something that represents something else.
Let’s take a look at those arcade tokens of old. Do you remember going into a Chuck E. Cheese for example and swapping your parents’ hard-earned cash for gold, round tokens? Those tokens each represented a quarter of a dollar. Instead of using the silver-colored quarters of the country’s currency (fiat money), this brand of arcade asked you to exchange your funds for its specific token, the Chuck E. Cheese token.
This token represented a quarter, or one gameplay if placed in the arcade’s systems. It was not a token that could be used elsewhere, and it is not a token that really had any real-world value outside the parameters of a Chuck E. Cheese establishment.
Tokens in crypto, however, have similarities and differences, depending on their use. A token in commodity trading is one that is “fungible,” meaning that (like a real-world commodity that was explained above) the tokens can be exchanged for one another directly, as they have an equal value. One token is not different from another.
Tradeable of fungible assets, in terms of crypto commodity trading, must be the same. They must have an equal value. They must be interchangeable.
Crypto Commodities Trading: An Example
To better understand the concept behind crypto commodities trading, it is ideal to look at a real-life example. Bitcoin, for such an example, was an early (and remaining) leader in cryptocurrency exchanges worldwide. Its use and popularity began to grow, and more and more places began using and accepting the crypto.
The Bitcoin network became valued for its decentralized nature, too. Some began to see how this same tech could be used in different ways, far beyond the simple online payments concept. This is how, for example, the development of Ethereum came about, which is the second-most popular crypto on the market. It uses a unique, smart contract-based, crypto-commodity system.
Ethereum works as a standard blockchain network. Its own virtual currency token known as Ether (ETH), offers more functionality than the bitcoin network.
On Ethereum, for example, anyone can create their own digital tokens, which are easily tradable and can have valuations independent from ETH. You can have 5 dog coins that equal 3 apple coins because everyone knows 5 dog coins is one ETH, and so is 3 apple coins. (OK, we made that one up, but you get the idea.)
These digitized tokens can be used to represent any kind of virtual or real-world asset. Online rewards, such as in-game objects, rewards points, or skins can be “purchased” with tokens via digital gaming. Alternatively, real-world commodities such as real estate, cars, or even property can also be valued in terms of tokens.
In other words, the use of such fungible tokens in the marketplace allows for items to be compared fairly and easily. If everything can be boiled down to its token value, you can actually compare the proverbial Apples to Oranges.
Crypto Not as a Security
Some cryptocurrencies are legally regulated and traded as commodities. These too can be called crypto commodities. They are not traded as securities, but rather as a standard commodity.
Security is broadly defined as a financial instrument that has value and can be traded. In everyday usage, it’s a word that encompasses stocks, bonds, exchange-traded funds (ETFs) as well as other investments. Crypto at times is considered a security.
Securities are closely regulated, however, by the Securities and Exchange Commission (SEC), while commodities are regulated by the Commodity Futures Trading Commission (CFTC).
Securities in the U.S. fall under three broad categories:
1. Equity securities usually refer to stocks or shares in a company.
2. Debt securities involve borrowing money. They typically include a fixed amount, interest rate, and maturity date.
3. Derivatives are securities whose prices are derived from another underlying asset. Options trading is an example of a derivatives market.
The Commodity Futures Trading Commission
The aforementioned Bitcoin and Ether are both examples of crypto that are used as a crypto commodity. The Ethereum network has its native coin, Ether is currently the second-most traded crypto, second only to Bitcoin.
The Commodity Futures Trading Commission (CFTC), as well as the Securities and Exchanges Commission, consider both forms of cryptocurrency to be a commodity. These two firms oversee the Ethereum network and Bitcoin, as they are the authority on what constitutes a commodity in this space, much like CBOT determines the quality of wheat as mentioned above. Since being defined as a commodity, this allows such markets to be overseen by governmental entities.
This distinction can become confusing, as the sales of securities are regulated by the United States and several other national governments. Bitcoin and Ether, which are not considered securities, are thusly freely traded on traditional asset markets.
This designation changes who can regulate what and what each asset is truly considered, at least in the eyes of the government. Because, too, these marketplace exchanges happen worldwide, it can be difficult to keep tabs on the sales.
Investigating Securities vs. Trading Commodities
This confusion, however, is not to say that there are no regulations in the space at all. On the contrary, such trading commodities are viewed often by various governments to keep tabs on commodity markets.
Take for example the cases with Tether (USDT) and USD Coin (USDC). As two of the most popular USD-backed stablecoins, both have stirred controversy in recent years.
Each has made its claims of a 1:1 stablecoin-to-fiat ratio, which for obvious reasons, has come under scrutiny. With the market volatility of crypto, it can be hard to know just how much fiat money would have to be on hand at any given time, not to mention having access to such funds.
An investigation by the CFTC found that from 2016 to 2019, Tether falsely claimed to have held an equivalent amount of fiat currency for every single USDT. In October 2021, the CFTC ordered Tether to pay a fine of $41M.
Governments, who are already not crazy about a decentralized digital assets marketplace, are still inclined to keep a watchful eye on the financial markets, no matter what they are called. Opting to conduct business through crypto and smart contracts does not make governments such as the United States any less interested in their fair share of the pie.
In other words, in order to be sure tax dollars are properly accounted for, Uncle Sam isn’t likely to back down anytime soon. While there is a core value of crypto and blockchain technologies to avoid a centralized power, federal oversight isn’t going away anytime soon.
The Future of Crypto Commodity Trading
No one knows for sure what the future holds, but as much of the crypto created today, there is always room for growth, change, and new developments. How these changes in the industry may impact the world of collectibles, investing, and online phenomenon like commodities remains to be seen and will likely continue to evolve over time.
Staying Informed
The key to any good subject is to stay informed. This is especially crucial for ever-changing and newly developing topics, such as the ever-evolutionary world of crypto. Understanding new platforms, companies, and investors in the space will keep you in control of your transactions with the tools of the trade at your side. Knowledge is power, and nowhere is that more true than in the
Do Your Research
Relying on well-researched resources is a must-have skill when staying informed. Trust sources such as FLOLiO to bring the latest trends, definitions, and new subjects to you directly. Our detailed-oriented articles, links, and treasure trove of informative resources will keep you in the know, no matter how the landscape changes.
Crypto Commodities is just one such topic to stay on top of in a complex world of constant change. Rely on a trusted source to bring you the latest and most informative data.
