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Gold-backed cryptocurrencies are a form of stablecoin directly linked to physical gold. This article explores what gold-backed cryptocurrencies are, how they function, examples of gold-backed cryptocurrencies, and so on.
KEY TAKEAWAYS
• A gold-backed cryptocurrency is a form of stablecoin that is directly linked to physical gold.
• Each such token represents a specific quantity of gold securely stored by the issuer or custodian.
• The best gold-backed cryptocurrencies to buy in 2024 are Tether Gold (XAUT), DigixGlobal (DGX), Paxos Gold (PAXG) and Gold Coin (GLC).
Gold-backed crypto tokens are unique cryptocurrencies with stable backing in the Web 3.0 economy. These stablecoins, directly linked to physical gold, offer investors a reliable and secure alternative for transactions, investments, and hedging against high market volatility.
By representing specific quantities of gold held in secure reserves, these cryptocurrencies ensure stability while also providing the potential for additional returns. In this article, we explore what gold-backed cryptocurrencies are, how they function, examples of gold-backed cryptocurrencies, and so on.
Let's first understand what cryptocurrency is. A cryptocurrency is a virtual currency over a blockchain network that works as a medium of exchange and is not reliant on any central authority, such as a central bank or broker, to uphold or maintain it.
Now, what are gold-backed cryptocurrencies? Gold-backed cryptocurrencies are a form of digital currency directly linked to physical gold. Each token or coin represents a specific quantity of gold securely stored by the issuer or custodian. Not only is this gold stored, but it is also generally insured and audited. We can say that each of such tokens represents a tokenisation of gold. The value of these crypto tokens remains stable, as it is mainly tied to the current market price of gold.
These cryptocurrencies have various use cases:
This is because precious metals like gold have less market volatility and can withstand inflation.
Gold-backed cryptocurrencies operate by holding physical gold in reserves. Custodians typically manage, insure, and secure these reserves. Mostly, banks or other third-party institutions act as custodians of these gold reserves.
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You should know that the backing ratio to gold varies depending on the cryptocurrency. Some gold-backed tokens are backed to a 1:1 ratio (1 token to 1 gram of gold). On the other hand, other gold-backed tokens may represent a fraction of an ounce.
Investing in gold-backed crypto offers stability and security, as gold has historically maintained its value. The value of these cryptocurrencies will not drop below the value of gold, making them relatively stable investments. Additionally, the value of gold-backed crypto can potentially exceed the value of gold itself.
Many gold-backed cryptocurrencies are built on the Ethereum blockchain, which means they are ERC-20 tokens. This means they can be easily stored and traded in wallets and exchanges compatible with ERC-20 tokens, like the BitDelta wallet and exchange.
While both gold-backed tokens and traditional cryptocurrencies are built on the blockchain network, there are a few crucial differences between the two:
Investing in gold-backed crypto has both its pros and cons.
Pros | |
Stability | Gold-backed crypto offers stability due to being backed by physical gold. This maintains consistent value over time. It acts as a hedge against price volatility, inflation, and currency devaluation. |
Liquidity | Gold-backed crypto benefits from high liquidity of gold, allowing easy conversion into cash or other assets without significant loss in value. It can be traded on various platforms and redeemed for physical gold or fiat currency. |
Accessibility | Gold-backed crypto enables fractional ownership, making gold more accessible to small investors. |
Higher Value | Legitimate gold-backed cryptos may have higher value than the spot price of gold, offering potential additional returns. |
Access to Blockchain Apps | They provide access to various blockchain applications beyond traditional gold ownership. |
Let's move on to the cons.
Cons | |
Counterparty Risk | Gold-backed crypto rely on centralised issuers and custodians, introducing the risk of fraud, theft, mismanagement, or insolvency. Researching the credibility and security measures of the token issuer and custodian is crucial. |
Fees | Investing in gold-backed crypto involves various fees, such as transaction, storage, redemption, or management fees. Comparing fees and benefits among options is important for cost-effective choices. |
Maintenance of Physical Gold | Investing in gold-backed crypto indirectly involves the ownership of physical gold, requiring considerations for storage and security. |
Negative Carry | Large amounts of physical gold can incur costs or losses associated with holding and managing, impacting overall investment performance. |
The best gold-backed crypto tokens and stablecoins to buy in 2024 are:
XAUT is a gold-backed token issued by Tether, representing one troy ounce of gold stored in Swiss vaults. XAUT can be redeemed for physical gold or cash and traded on exchange platforms.
DGX offers fractional ownership of 99.99% pure gold from certified refineries. Each DGX token represents one gram of gold, which is audited and insured. It can also be redeemed for physical gold or cash.
The PAXG cryptocurrency represents one troy ounce of gold stored by Paxos in Brink's vaults. PAXG is allocated to specific bars with unique serial numbers and can be redeemed or traded on exchanges.
GLC is a decentralized cryptocurrency backed by one gram of gold, allowing redemption for physical gold or cash. Staking GLC in master nodes offers additional earning opportunities.
PMGT is a tokenized version of the GoldPass certificate from the Perth Mint, representing one troy ounce of gold stored in their vaults. PMGT can be redeemed or traded on exchanges.
MCAU uses the Algorand blockchain to enable fast and scalable gold transactions. Each MCAU token represents one gram of gold which comes from Australian refineries, and these tokens can be redeemed or traded on exchanges.
We recommend that any prospective trader should first learn about gold-backed crypto tokens in detail and then invest in the asset class.
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We can’t tell what the future holds for gold-backed cryptocurrencies, but there are a few developments we should note. Several projects are contemplating integrating gold-backed tokens into decentralised finance (DeFi) protocols.
The asset also opens the possibility of mass tokenisation of gold, which can be a game-changer in the global financial order. In the modern digital economy, lending and borrowing such assets for business or personal purposes can be made easier.
Digital ownership of gold could become huge in the future as more people choose to opt for gold-backed cryptocurrencies. The possibility of owning gold in fractional terms is a huge benefit for investors who aren’t capable of purchasing gold in wholesome quantities in the retail market. As the entry barrier gets lower, a more dynamic and participatory market will emerge for the asset.
It is also possible that the retail gold market, which is already digitised, can be integrated with gold-backed crypto tokens. We are hinting at the nearly imminent possibility of the merging of centralised and decentralised gold markets. While both markets exist independently, they could interact with each other.
Gold-backed crypto tokens are easier to purchase and store for investors who don’t want to carry the risk of keeping physical gold. The new asset provides a safe and easier route to such traders. The gold market is pregnant with the possibility of a major disruption in the future, thanks to such emerging trends. There are endless possibilities if we adequately deploy such assets.
A gold-backed cryptocurrency is a form of virtual currency that is directly linked to gold in the physical form. Each such token or coin represents a specific quantity of gold securely stored and insured by the issuer or custodian.
Gold-backed cryptocurrencies operate by having physical gold held in reserves. These gold reserves are typically managed by custodians, often banks or third-party institutions. While some gold backed tokens are backed to a 1:1 ratio (1 token to 1 gram of gold), others may represent a fraction of an ounce.
Many gold-backed cryptocurrencies are built on the Ethereum blockchain, i.e. they are ERC-20 tokens. You can trade these assets in wallets and exchanges compatible with ERC-20 tokens, such as BitDelta.
The primary use cases of a gold-backed cryptocurrency are:
Gold-backed cryptocurrencies are highly liquid as the asset backing the token, i.e. gold, itself is very liquid. It also depends on whether a certain token has enough trading volume, is listed on enough exchanges and its gold reserves are secure.
Yes, there are several gold-backed stablecoins in the burgeoning crypto market. The leading gold-backed stablecoins you can buy are Pax Gold (PAXG) and Tether Gold (XAUT).
Neither Bitcoin nor Ethereum can be called a gold-backed cryptocurrency because it is not backed by gold. In fact, most cryptocurrencies aren’t backed by any tangible asset like traditional fiat currencies or gold reserves.
Yes, gold-backed cryptocurrency is considered safer than other cryptocurrency because it is backed by gold. Given that gold is a very precious metal and is stored, secured and insured by a custodian, such tokens are quite reliable as far as safety is concerned.
Yes, you can redeem gold-backed cryptocurrencies for physical gold. You can exchange their gold-backed tokens for the equivalent amount of physical gold, held securely by the custodian.
The best gold-backed cryptocurrencies to buy in 2024 are:
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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