Gold-backed cryptocurrencies caught the eyes of many amid turbulent financial conditions due to the effects of COVID-19.
Demand for Paxos Gold (PAXG) and Tether Gold (XAUT) began to surge in late March. Traditional gold suppliers announced difficulties in providing physical bullion due to panic buying and fiscal management efforts by the Federal Reserve.
A Long And Colorful History
Gold has been seen as a valuable and stable asset since early civilization. So it’s no surprise many have tried to hinge an alternative method of payment on the shiny metal.
E-Gold was the first attempt to cultivate an entirely gold-backed currency. Launched in the 1990s, millions took advantage of the service until it was shut down.
Some believe the project failed due to its centralized nature that could not keep up with KYC/AML regulations and money transmission laws associated with the Patriot Act.
The new millennium has brought a proverbial gold-rush as numerous cryptocurrencies backed by the precious metal have emerged.
As of January 2020, research showed about 77 gold-backed concepts, initiatives, and projects in existence. Current projects include PAXG, XAUT, AnthemGold (AGLD), Perth Mint Gold Token (PMGT), and GoldCoin.com.
It’s important to remember not all cryptocurrencies with the word ‘gold’ in their name are related to gold or backed by it. Two prominent examples are Bitcoin Gold and Ethereum Gold. Bitcoin Gold is just a fork from Bitcoin, and Ethereum Gold strictly is based on blockchain.
The Pros And Cons Of Betting On Gold-Backed Cryptocurrency
Gold-backed cryptocurrencies are popular for a few reasons.
Stablecoins in general are garnering interest as a counter to a volatile cryptocurrency market. Some speculate a cryptocurrency backed by a well-known asset like gold should be able to weather tough financial circumstances.
There are a few considerations to keep in mind when it comes to gold-backed crypto. The concept has several notable pros and cons prospective investors should consider.
Pro: Legitimate Gold-Backed Cryptos Can Sell For More Than Gold’s Spot Price
Popular gold-backed cryptocurrencies like Tether Gold (XAUT) and Digix Gold (DGX) were selling between 1-5% above the .999 Troy ounce spot price of the physical metal in April. The surge came right in the middle of massive renewed buyer interest in gold after the metal tool a price plunge in mid-March.
Investors who choose to purchase a (legitimate) gold-backed cryptocurrency could watch the asset become more valuable than the spot price of the precious metal in certain market conditions. If the cryptocurrency does not do well, the lowest price it could sink too is the current price of gold. This contrasts with mainstream cryptocurrencies like Bitcoin or Ethereum that could theoretically become worthless.
Con: Maintenance Of Physical Gold Can Be Tricky
Some choose to invest in gold-backed cryptocurrencies to avoid having to store and manage physical gold, which can be heavy and troublesome to safely secure.
There have been many purported gold-backed cryptocurrencies that did not have actual stores of the physical asset to back it up. Gold is also a metal that can be faked with tungsten.
The costs a legitimate project incurs to store and secure physical gold might be passed onto users in the form of higher fees. This can make an investment in a gold-backed cryptocurrency a venture that’s not financially lucrative.
Pro: Offers Access To Various Blockchain Apps
One of the advantages of ‘tokenizing’ gold is versatility. Holders of a legitimate gold-backed cryptocurrency can use it as money, trade it, and potentially redeem for gold derivatives. Digital currency that’s backed by gold can also be easier to sell than its physical counterpart.
Con: Negative Carry Comes Into Play With Large Amounts Of Gold
Having to maintain and keep up with large amounts of physical gold leads to a concept known as negative carry. This opens up gold-backed cryptocurrencies to a decaying value per unit, even if a token remains relatively static with the spot price of gold.
In addition, gold potentially has a supply (if mined and processed) that’s more than cryptocurrencies like Bitcoin that have a definitively fixed amount of coins that can be mined.
The Future For Gold-Backed Cryptocurrencies
Cryptocurrencies backed by gold have gained notoriety as a check against volatile markets.
There are several pros and cons to the concept, which makes it vitally important for prospective investors to research and confirm the project has physical gold that’s safely secured to back up any coins.