If you’re familiar with the world of crypto, then there’s a good chance you’ve heard the buzz around asset-backed cryptocurrencies (ABCs). Unlike their more volatile counterparts, ABCs offer a stable foothold, with each unit tethered to a tangible asset. This innovation promises a level of stability and transparency that’s piqued the interest of savvy investors. In this article, I’ll give you a quick overview of ABCs, highlighting the challenges and benefits they present. You’ll gain insights into how these digital assets maintain their value and why they are billed to be a game-changer. To give you just a very quick example, stablecoins, like USDT or PAXG are already being used every day, not just for transacting, but also for store of value and as means of exchange. They have become a staple in the industry and their influence is undeniable.
What are Asset-Backed Cryptocurrencies?
Asset-Backed Cryptocurrencies (ABCs) or also known as Asset-Backed Tokens (ABTs) are a new type of digital asset that represents digital rights to ownership (or any other rights) for meeting three major criteria – full compliance, minimal risk of asymmetric information, and thin management layer. By anchoring their value to tangible assets like precious metals, real estate, or fiat currencies, ABCs mitigate the extreme price fluctuations. This level of steadiness not only attracts risk-averse investors but also renders asset-backed cryptocurrencies viable for everyday transactions and long-term investments.
Advantages of Asset-Backed Cryptocurrencies
Asset-backed cryptocurrencies aim to bring together the benefits of digital tokens, such as fast transaction speeds and accessibility, with the value of tangible assets. The advantages include reduced volatility, lower transaction costs, increased liquidity, transparency and security, lower counterparty risk, increased accessibility, and portfolio diversification. Additional benefits that are driving this asset class can be:
- Stability and Reduced Volatility: One of the most important attributes that set asset-backed cryptocurrencies apart is their reduced price volatility. This stability makes them suitable for everyday transactions and long-term investments.
- Transparency and Regulatory Adherence: Asset-backed cryptocurrencies provide stability and can be easily converted to fiat currencies. This compliant process ensures transparency and regulatory adherence in the conversion of ABC to cash or its equivalents.
- Global Accessibility: ABCs are borderless, providing liquidity and accessibility to a global audience. This feature opens up new investment opportunities and increases trading volumes.
- Reduced Intermediaries: Smart contracts can automate various processes, reducing the need for intermediaries like brokers and custodians, which can lower transaction costs.
Challenges of Asset-Backed Tokens
While asset-backed tokens offer several benefits, they also come with risks and challenges. For example, the underlying asset’s value may decline, negatively impacting the asset-backed token’s value. Additionally, the management and custody of the underlying asset can be complex, and regulatory hurdles and security concerns are also significant challenges to consider.
These projects are at the forefront of developing asset-backed tokens and are leveraging blockchain technology to create a new class of digital assets. They offer a unique investment opportunity for those looking to diversify their portfolios and gain exposure to real-world assets through the transparency and security of blockchain technology
Tax Implications of Investing in Asset-Backed Cryptocurrencies
The tax implications of investing in ABCs can vary, but in general, they are subject to existing tax rules. In the UK, individuals holding cryptoassets as a personal investment are usually subject to Capital Gains Tax (CGT) on gains when they dispose of the assets. If an individual is deemed to be “trading” in crypto assets, the profits made may be subject to income tax. Record-keeping and valuations can also impact the tax implications.
Conventional cryptocurrencies, such as Bitcoin or Ethereum, are purely digital assets that are valued based on market demand and supply dynamics. In contrast, asset-backed tokens (ABTs) are linked to real-world assets, such as fiat currencies, real estate, fine art, or commodities. This backing provides the tokens with a measure of stability and trust, as their intrinsic value is tied directly to the worth of the assets they represent.
The value of an asset-backed token is directly affected by the worth of its underlying asset. For example, if the value of the underlying asset increases, so does the token’s value. Conversely, if the value of the underlying asset decreases, the token’s value also decreases. This stability makes asset-backed tokens more suitable for everyday transactions and long-term investments.
In other words:
Asset-backed tokens (ABCs/ABTs) are digital representations of real-world assets, such as fiat currencies, real estate, fine art, or commodities, stored on a blockchain using smart contracts.
Smart contracts are programmable and executable pieces of software that determine how crypto tokens operate. They automate and enforce the terms of an agreement without intermediaries.
The process of creating an asset-backed token involves several steps:
- Asset Validation: Trusted third-party auditors or institutions thoroughly validate the existence and value of the underlying asset.
- On-Chain Minting: Upon successful validation, the asset-backed tokens are minted or created on-chain.
- Exchange and Transfer: The minted tokens can be easily exchanged, transferred, or traded on blockchain-based platforms like regular cryptocurrencies.
- Redemption: Asset-backed tokens that have redemption value allow holders to exchange their digital tokens for the underlying asset, such as fiat currency, gold, or real estate.
The Purpose of Asset-Backed Tokens
The main purpose of asset-backed crypto tokens is to provide stability and reduce the volatility often associated with cryptocurrencies like Bitcoin. By pegging the value to real-world assets, these tokens aim to combine the advantages of blockchain technology with more predictable and secure investment options. Asset-backed crypto tokens can also create new liquidity in markets such as fine art and antiques, opening up ownership to global digital markets and attracting digital-savvy investors regardless of location who may not have engaged with traditional auction processes. Tokenization also facilitates easier and faster transfers of asset ownership.
Examples of Asset-Backed Cryptocurrencies
Stablecoins are the most common form of asset-backed cryptocurrencies. Tether (USDT) and USDC are stablecoins that are backed by the US dollar. PAX Gold (PAXG) is an example of a commodity-backed crypto token, as it represents ownership of one fine troy ounce of a London Good Delivery gold bar stored in a secure London vault.
These are just some of the examples, not all ABCs are designed to be stablecoins, more use cases and applications are being developed as we speak.
👉 👉 Sign Up for the Crypto Corner Newsletter and get more insight on the crypto markets, new releases and updates, plus my personal choice of coins to trade.
📖Free eBook “Best Crypto Wallets” is the best guide for all the top-performing crypto wallets. Both hot and cold wallets are reviewed by me and from personal experience.
📖“Learn Crypto” eBook is the ultimate beginners guide to cryptocurrencies that helps you avoid the mistakes all newbies make when investing in crypto: https://LearnCryptoNow.com
Recommended:
Use Brave Browser for extra security and earn crypto at the same time. It is privacy-oriented and blocks unnecessary cookies and much more: https://brave.com/ojj095
Get your own Web3 blockchain domain – no yearly fees and censorship-free with Unstoppable Domains: https://unstoppabledomains.com/?ref=46122235f05f405
Aurox – my top charting tool and indicator for finding the right entry and exit points for trading on any of the top exchanges and trading pairs. Give it a try and sign up for free: https://aurox.app/iwr
Want to know how to make money by investing in crypto?
Grab a copy of my best-selling eBook “Learn Crypto” to find out all about the cryptocurrency market, the different blockchains and the “Do”s and “Don’t”s of how to build a successful crypto portfolio. It’s now in its second edition.Find out more: LearnCryptoNow.com
“Crypto Wallets” is a Free eBook to guide you in choosing the right wallet for you. All the popular Hot and Cold Wallets are reviewed in this useful guide, most of which I personally use, or have used in the past. Self-custodial and custodial services too.
Find out more at: https://www.ojjordan.com/crypto
⚠️ DISCLAIMER ⚠️
The information contained in this video is for informational purposes only. Nothing herein shall be construed to be financial or legal advice. The content of this post reflects solely my own opinions. Purchasing cryptocurrencies poses considerable risk of losses.
Quote Of The Day
You’ll never predict every Bitcoin move, and neither will I. But we don’t need to. Mark your key levels. Keep track of your progress.…
Quote Of The Day
Life is precious, so have a laugh more often 😉 “A budget tells us what we can’t afford, but it doesn’t keep us from…
Quote Of The Day
I couldn’t have said it better myself. “If you want to know what God thinks of money, just look at the people he gave…
Crypto-Corner 