Do a Cryptocurrency require an underlying asset?
On May 19 this year, China started to ban companies and financial institutions “from providing services related to cryptocurrency transactions.” Their problem is the volatility with these coins, citing that they “are not supported with real value,” and definitely it caused bitcoin to a 12% decrease to $39,700.
Two days later, Bitcoin fell another 8% from its day to day peak of $40,000 due to the Bank of Japan Governor citing in an interview that it “barely used as a means of settlement,” due to its lack of real backup value like its stable coin counterparts. These comments led us to wonder: do bitcoin and other altcoins require an underlying asset? Can it tackle the volatility problem with these major altcoins?
What is the function of the underlying asset and what is the right underlying asset?
The function of an underlying asset or a hedge generally is to mitigate the risk(s) involved in Crypto assets. It gives the Crypto assets, in general, a real intrinsic value to every coin you are buying.
Then the question remains — how is our traditional Fiat money a store of value? You can argue that cryptocurrency is created to solve this problem but if Fiat money is losing value with its massive printing due to the stimulus, bitcoin and other utility coins do not have any real value, it is just a number on a screen.
The value in all these utility coins is simply speculation and hype. If cryptocurrency aims to be a settlement method, it needs a proper asset to justify its value and not only market speculation. One example of a proper asset is commodities like gold, silver that has been a store of value for hundreds of years and is continuously limited in value.
Can it solve the volatility problems?
Well, you can never fully mitigate speculation and there are probably no limits to where hype can go. On the other way, there is also no absolute certainty as to when a hype can stop.
For example DGX Gold is backed up by 1gram of Gold. As investors, people know the real value of the coins they are holding and so they will never sell the coins below their value and buy it at an overprice therefore stating a clear price for the market. This will provide the stability needed to tackle volatility issues in the market.
Does every coin have to be hedged to an underlying asset?
There are no clear regulations as to whether every coin has to be hedged with a real asset but in the long term it needs a real price to move forward as the future for a settlement system. Otherwise speculations will continue, as long as investors don’t know the real value of the assets they are holding. Mr. Lo Kheng Hong, who is deemed the Indonesia Warren Buffett commented he preferred stocks over bitcoin when asked why? He stated, “When I buy a stock, there is an underlying asset. There is a physical company, and we can see the company.”
We in Nagaya Technologies believe that cryptocurrency in a whole has a huge potential to eventually fulfill its purpose to be a settlement system. Therefore we hedge 50% of our NGY coins with pure LBMA Gold which in therefore creating a Crypto asset that is stable and also increases the value for its investors. Interested to know more about Nagaya Technologies and our Hybrid Crypto Asset, you can find out more at www.nagaya.io
Or you can talk to us at t.me/nagayaofficial
