Blockchain technology has started to show immense potential in transforming commodity markets all over the world. Commodity trading markets traditionally use copious amounts of data and paper trails to execute each transaction.
Moreover, the complexity and intricacies of global trade have led to many challenges when trading commodities. This is where blockchain technology comes in. Blockchain can make analog and paper-based procedures obsolete while offering transparency in the market.
In this article, we’re going to find out:
- what a commodity market is
- how commodities are traded
- the benefits of trading commodities
What Is A Commodity Market?
A commodity market is a platform to buy, sell and exchange primary products that are considered homogenous, in bulk. A commodity must meet basic requirements such as regulation, standardization, and utility.
Commodities can be classified into two categories: hard commodities and soft commodities.
Hard commodities consist of resources that are extracted or mined, such as precious metals, oil, gas, etc.
Soft commodities comprise agricultural products and raw materials, such as sugar, coffee, and dairy.
Commodity markets are often used by producers and consumers as a hedge against inflation and are sometimes relied upon when the stock market is volatile. High liquidity in the market ensures that all prices are competitively established and determined by supply and demand.
How Are Commodities Traded?
Traditional commodity exchange platforms guarantee each trade transaction using intermediaries responsible for ensuring the trade goes through smoothly between the buyer and the seller.
These intermediaries are known as clearing members. They are usually large financial institutions and service companies. Commodity trading markets can generally be divided into two different types in the cryptocurrency space.
1. Spot market
Also known as cash market, financial instruments like securities and physical commodities are exchanged for immediate delivery. Delivery refers to the process of exchanging cash for the instrument being traded. In this type of market, you have direct ownership of the asset and are entitled to various legal rights.
2. Derivative Market
The second kind is known as derivative market, which uses financial instruments like futures contracts that derive value from underlying assets.
Currently, the most popular medium of trading commodities is via futures contracts. When a buyer purchases a futures contract, they do not own the asset it represents. Instead, the buyer procures a contract that shows the trade of a certain cryptocurrency, either buying or selling that asset at a predetermined future date.
Benefits of Trading Commodities on Blockchain
Blockchain has enabled the growth of multiple industries across a variety of sectors. Previously, commodity exchange platforms were only accessible to users who were able to open massive credit lines.
Now, because of blockchain, the market has been democratized.
This has allowed new traders to use the market with ease, availing benefits of transparency, lack of intermediaries, and other such advantages.
Let’s look at the specifics of the benefits that blockchain offers in the commodity market.
All relevant trade data of a commodity exchange are stored on the blockchain, making it safe from third-party intrusions. In case any discrepancies occur in the exchange, action can be taken swiftly because of blockchain. The accuracy, time sensitivity, and granularity of the data stored on the blockchain allow for maximum efficiency.
P2P exchange platforms enable access to global markets of crypto all over the world in just a few seconds. Most of these exchanges also have a “zero trading emoluments” policy, making it very convenient for small traders to use P2P trading platforms as well.
Blockchain uses a decentralized ledger for all transactions, which makes it very easy to spot irregularities in invoices, carousel transactions, etc. As all settlements happen in real-time, the risks involved with trading in a commodity market reduce significantly.
Several companies and institutions have invested in technology to establish better regulatory demands and financial confidentiality. Additionally, a McKinsey report published recently shows the heavy emphasis that is being placed on sustainability, another aspect that blockchain helps in.
Access Tokenized Commodity Market via TijarX
Blockchain technology eliminates the inefficiencies in traditional commodity trading. Using this advantage and recognizing the need for an ethical and halal DeFi solution, MRHB has built a platform for trading tokenized commodities. With zero trading fees, TijarX exists as a wealth preservation financial solution whilst encouraging excluded communities to participate in commodity trading.
You can start buying tokenized Gold and Silver, backed by 100% fully allocated gold and silver bullion respectively. Download Sahal Wallet to access TijarX.