Making Commodities Investable
As a builder looking to make a protocol to make Commodities an investable asset class accessible to DeFi investors, I always get asked, “Why would DeFi investors want to invest in commodities?”
Indeed, it is a valid question, given that DeFi has presented investors with what is possibly the most lucrative investment opportunity that this generation has ever seen. So why would someone making 3-digit APY returns seek an asset class like commodities?
The simple answer to this question is — to create an all-weather investment portfolio. One that can stand the test of time, creating & preserving wealth in an uncertain, inflationary environment.
What asset classes do investors want?
As a student of economics and finance, I dreamed of working in a space where I was truly able to apply the lessons I’d learned on behavioral economics and combine them with my understanding of finance to make a real impact. I was fortunate enough to have been given support to pursue a career in wealth management, working directly with some of the most successful professionals in the field, based out of Canada.
One of the first lessons I learned from my career in wealth management was genuinely understanding the motivations of individuals (especially HNIs) when they invest. Contrary to my initial instincts, the answer wasn’t short-term high returns or huge percentage gains, but rather long-term preservation of capital against sustained inflation.
More than five years since I started as a wealth management professional, I’m still in regular contact with the people I worked alongside, and the story hasn’t changed. Inflation is now the preeminent problem that investors are looking to overcome. Any investor, informed enough to employ paid wealth management services, is aware of the actions the Federal Reserve and other central banks worldwide have taken in the recent past. With the sustained expansionary policies adopted worldwide, the Fed has printed nearly 25% of all money in circulation in the past year alone. Put simply — the Federal increased the maximum supply of the USD by 25% and airdropped most of the added supply to the public. Although intended to boost the economy by encouraging spending, such action also tends to contribute directly to inflation, reducing the purchasing power of every dollar. This has profound implications on investors’ ability to preserve the value of their capital.
Numbers can lie
In addition to the challenge of inflation, investors are burdened by choosing the right asset classes to invest in. The definition of the “right” asset class may vary from investor to investor, subject to their unique objectives and an individual appetite for risk. However, the most common theme is an opportunity to invest in assets of intrinsic value that can outperform inflation over the long term. Essentially investors want the security of the asset having genuine underlying value while simultaneously providing an inflation-adjusted, sustainable return.
Investors typically do this by collecting and analyzing data to create an investment hypothesis. Economic indicators from the recent past paint a grim picture for the prospects of equity markets, quite contrary to the way equity markets have performed over the same timeframe. It is now harder to make investment decisions than it has been at any other time in the recent past. It is in such times that investors need to be given access to alternate investment avenues, offering stable, predictable, and safe returns.
With inflation rates already peaking and equity markets showing no correlation to the underlying economic data, where are investors to go?
Commodities — the asset class
Global commodities trade is one of the oldest and largest industries globally, with an estimated volume of ~$17 Trillion traded annually. Commodities like metals & agri-products make up the majority of what we consume and utilize as a species. It is, therefore, quite clear that commodities inherently possess intrinsic and tangible value. Debt in the commodities trade industry is historically safe, with relatively low default rates. Consequently, it seems evident that commodities have a finite supply and an ever-growing demand, making them inherently inflation resistant. It, therefore, seems like a logical match to have investors use the safe portion of their portfolios to take exposure to commodity-based assets.
However, the picture, in reality, isn’t as simple as that. Today, retail investors have to jump through several hoops and hurdles to take exposure in commodity assets. Exposure in commodities is usually done with futures contracts, which also comes with risks and costs of physical storage and roll-over at contract expiry. For this very reason, you don’t often see retail investors investing in commodities since only the large institutions can take this exposure and sustain it.
In such a scenario, there is a need for the democratization of the industry. I believe that any investor should be able to take exposure to commodities without regulatory hurdles and the risks and costs associated with physical storage.
Making commodities investible
Building Comdex has given me a chance to fulfill my dream to create a solution that has a positive impact on investors by giving them access to an asset class they previously couldn’t access and an asset class that helps them fulfill their needs for long term preservation of capital in an inflationary environment.
The 2020 crypto bull run has created many new millionaires or HNI’s, whose priorities with regards to wealth have gradually shifted away from seeking returns, or the building of wealth, towards the long-term preservation of that wealth. Naturally, these investors will begin to diversify their portfolios in the search for asset classes that can protect them against the volatilities of global markets and the negative impact of inflation, degrading the purchasing power of their capital. As such, there is a need for an “all-weather portfolio” that enables investors to capture the upside of bullish markets without exposure to the downside of bearish markets. Comdex seamlessly bridges that gap, providing crypto native & trad-fi users alike with the tools they need to diversify their holdings, taking advantage of the global shift from equities into commodities.