Commodities trading existed since antiquity, beginning with grains and livestock, and then moving on to precious metals like gold and silver. The concept of money was unknown then, societies mainly barter trade physical goods with each other.
In the present world, commodities can be divided into four main categories: agricultural, energy, metals and environmental.
There are two main reasons why investors are primarily interested in commodities trading, that being, to diversify their portfolios and increasing demand due to populations growth.
To diversify investment portfolios
Having an asset aside from stocks and bonds can help you diversify your portfolio, thereby reducing the overall risks of your investments.
Some commodities have a negative correlation to traditional assets, which may reduce the volatility of your portfolio.
Here are some examples from MRCI’s Inter-Market Correlations: Gold (CMX) and US Dollar Index (ICE) has a correlation of -0.91. S&P500 E-Mini (CME) and Soybeans (CBOT) have a correlation of -0.77.
Demand increases due to population growth
Today, the world’s population stands at 7.2 billion, and the United Nations predicts that it will reach 9.8 billion by 2050.
Population growth and demographic shifts have resulted in a much higher demand for commodities.
That’s because growing populations will require agricultural products to feed their families, and energy commodities to light up the night and keep themselves warm.
However, entering these markets is not as simple as filling up a form and opening an account.
There are high barriers to entry have deterred many would-be investors, such as having to be considered as an “accredited investor”.
A doorway to commodities trading
Cryptocurrencies introduced the concept of tokenization, where the rights of an asset, such as the ownership of a commodity, equity, or real estate — can be converted into a digital token that resides on the blockchain.
These tokens can be traded, regardless of geographic location or trading hours. Additionally, the transaction fees are significantly lower since there are no brokers involved.
Tokenization opens up the possibility of fractional ownership of an asset. Barriers to entry will be a thing of the past as investors do not have to show proof of having collateral or coughing up a hefty deposit.
Gone are the days where one will have to go through rigorous scrutiny to be considered as an accredited investor!
Written by James Koh, Community Manager of Virtuse Exchange. Our mission is to break down those barriers and let everyone participate in global markets at any level of investment without having to pay intermediaries.
