Asset backing is an essential component in the qualification of investment products and digital assets, as it provides a guarantee to the financial asset. In the cryptoactive world, stablecoins are recognized as a digital asset backed.

But what exactly is the ballast of a financial product?

It is a recognition of value to something that is only a convention. For example, the stock is backed by ownership of a small part of the company. A gold investment fund is backed by the reserves purchased.

The best way to understand this concept is to imagine a personal loan with a property as collateral and a loan without any collateral. Which will be more expensive?

We can see, therefore, that ballast can impact the reliability and cost of the asset.

In the token market, it is a present component, it lends credibility to operations and increases people’s confidence in this way of doing business and investing.

BLOCKBR, a web 3.0 native company, will talk about the importance and how ballast works in digital assets!

HOW IMPORTANT IS BALLAST IN INVESTMENTS

As we can see so far, ballast is a representation of real collateral for a financial transaction and also for investments – and perhaps here this concept is even more important.

All people want to invest in products that are financially anchored to something that can be used as a guarantee that the commitment to income and redemption will be met (but we should not confuse this with risk).

Therefore, the ballast in the investments demonstrates the value they have in the market. An interesting example is to analyze the Real Estate Letter of Credit and bitcoin.

The LCI is a backed financial product, because it is anchored in financial operations made for the real estate sector and financed by the purchases of the bonds.

Bitcoin, on the other hand, is an unbacked financial digital asset based on the greatest of its characteristics: the fact that it is decentralized – it is not tied to monetary policies and collateral such as property and foreign exchange.

We can see, therefore, that as interesting as bitcoin investing is, with gains that surprise even the most enthusiastic cryptocurrency enthusiasts, the lack of anchoring in assets that are recognized still turns many people off.

HOW BALLAST CAN AFFECT THE ECONOMY

A good example of the impact of the absence of collateral tied to an asset was the US government’s decision in 1971 to de-anchor the dollar from gold.

Fearing the lack of the security that gold provided, several governments to buy the metal, causing a huge appreciation in the following years – over 2,600% in almost 50 years.

This shows how the existence of added and recognized value gives security and credibility to an application.

Gold Price Evolution 1970-2020

Source: https://or.fr/

HOW BALLAST WORKS

Whether it is a traditional financial product such as a CRI (certificate of real estate receivables) or a financial digital asset such as a receivables token, the distribution of it, providing for the tying of the results to a guarantee, we call the operation’s ballast.

In the two examples given, the collateral is clear and recognized: real estate credits and a company’s receivables portfolio.

With disclosure, anchoring will play the role of perceived investment collateral – however, it is important to remember that this does not eliminate the risk inherent in each financial asset.

BALLAST DOES NOT ELIMINATE THE RISK

One of the great confusions that exists in the market in general is the idea that a ballasted asset is risk-free. Actually, they are two different concepts and the explanation is more complex.

While ballast is the representation of added value in the market, risk is the measure of the possibility of losses based on innumerable factors – macroeconomic, sectorial, cyclical, and even seasonal – that are not avoidable or controllable.

On the other hand, we can say that ballast helps to mitigate the risk.

Two cryptocurrencies are a great example of how these attributes differ.

• The tether is a digital currency backed by the dollar;
• Bitcoin is not backed.

We can say that the backing helps stabilize the volatility of the tether, but both are high risk, because they are exposed to high degree of speculative and market factors, and because they are decentrally traded assets without government guarantees.

EXAMPLES OF ASSET-BACKED SECURITIES

• Precatory bonds: guaranteed by fractions of the public debt;
• Real estate funds: credits and rights to real estate;
• Agribusiness letters of credit: financial operations in the sector.

TaaS: Everything you need to know about token-as-a-service!

DO DIGITAL ASSETS HAVE BALLAST?

To understand ballast in crypto-assets, we need to divide the analysis into the two categories.

CRIPTOMOEDAS

As we saw earlier, there are stable currencies, which are backed by collateral, but most of them are not tied to collateral recognized in the market, which increases the investment risk.

ASSET AND RIGHTS TOKENS

Tokens are not a financial product per se, but a digital representation of a product that can be of many different types, the tokenization market is increasingly diverse in assets, rights, and projects that can be offered with tokens.

And here is the big difference: the ballast is in the asset traded through tokens.

So we can’t say that the token is backed in a general way, but that tokens of shares of a company are backed because the asset confers this guarantee.

All the examples of financial asset-backed securities we mentioned above can be traded through tokenization, in addition to many others, such as agribusiness tokens, which are linked to the crops and/or results of the sector.

Even tokenized personal property, such as works of art and other high-value collectibles, is secured in the estate itself and/or has specific conditions that the process smart contract defines.

Therefore, when researching token marketplaces such as BLOCKBR, investors should analyze what guarantees are attached to each and choose the token that aligns with their expectations of return in value and term.

BLOCKBR Digital Assets
is a web 3.0 native fintech that brings together technological innovation and digital knowledge to transform physical assets into digital assets, in the process of tokenizing assets.

The supply of physical assets and tokenized financial assets, both current and new, is democratic and decentralized, which makes the way of investing safe, simpler and more efficient.

We enable, structure, issue and offer tokens on our platform and beyond. Be aware that tokens depend on feasibility and regulatory factors.

Do you want to tokenize your business or part of it? Do you have a business solution and does it make sense to issue your own token ?