Precious metals-backed cryptocurrencies

Good Morning Ladies and Gentlemen

«Happiness is contagious; spread it!» (from a fortune cookie)

Once in a while, I receive emails with questions about cryptocurrencies. For example, one reader argued that cryptocurrencies backed by precious metals would be tangible. Another reader asked me if governments/central banks could issue cryptocurrencies out of thin air. Of course, I am happy to share my take on it.

Gentlemen’s agreement

However, first, for an interview in the Executive Global Magazine, I was asked to describe what defines Incrementum AG; this is what I said:
«Besides the fact that we love what we are doing and are very passionate about what we do, we are patient and generous with our staff, customers, outsourcing partners, and ourselves. (I know, this is a bit taky and what everyone would say, the next part is key, though). However, one of the critical factors for success in our organisation is the gentlemen’s agreement among partners to take any strategic decision only with 100% consent by all five partners. To reach a consensus, it is necessary to approach others, take their needs and wishes seriously, and put one’s wishes and needs on the back burner to some extent; this has fostered not only trust among us partners but also promoted responsible action.»

Tangibility

If an investor considers the fact that an asset is physically tangible to be necessary, cryptocurrencies will not be able to play a role in his investment universe. Under no circumstances are cryptocurrencies tangible; this was probably quite deliberately never part of the design equation of cryptocurrencies and should, therefore, not be an expected feature. The good thing about physical precious metals is their tangibility. No cryptocurrency will ever have that feature; we should never forget that.

What about precious metals-backed cryptocurrencies?

The same is true here; cryptocurrencies are not tangible, even backed by precious metals. In this context, we can also use futures on precious metals as an example. Although precious metals themselves are tangible, futures on them are not. Again, this is because they are not „tangible“; they only exist in «paper» or digital form.

Investment purpose

However, depending on an investor’s investment purpose, precious metals-backed cryptocurrencies, which is today’s topic, may represent a valuable investment tool. So it comes down to one of asset management’s most important questions: „what is your investment purpose»? If a solid and regulated issuer issues a token backed by physical precious metals and if those precious metals are regularly audited and stored in a known or better in many different and known locations, and if the storage, the management of the process, the insurance, the auditing etc. is not costing an arm and a leg in yearly fees, there may be a market for precious metals backed crypto assets.

Cost

Nevertheless, investors should remember that precious metals do not produce cashflows. However, managing, storing, insuring, and auditing the physical precious metal of any such precious metals-backed crypto asset creates cost. The critical question to look out for is how the issuer of such tokens caters to the cost.

What about cryptocurrencies issued by governments?

Cryptocurrencies issued by governments would presumably be regulated by the issuing government and backed by its national economy. They could be issued like today’s conventional currencies within the given central bank’s mandate (and yes, if you want to some extent „out of thin air“). As pure book currencies, they would not be tangible either. Cryptocurrencies issued by governments would most probably lose the design feature „crypto“ because I assume governments would probably build in features offering them full transparency about who uses the currency where and for what. In this respect, it would be a „digital fully transparent currency“ rather than a cryptocurrency.

Ladies and Gentlemen

As always, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.
Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and peace above all!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li