12 min read
🔑 Shining a Light on Gold Backed Crypto Investments
Gold, an asset revered throughout history for its stability and value, has entered the digital age. It's been merged with blockchain technology, creating what's known as tokenized gold. These digital assets, or cryptocurrencies, derive their value directly from physical gold.
Bitcoin, often referred to as "digital gold," shares a key characteristic with its precious metal counterpart - scarcity. However, the analogy, while convenient, doesn't fully capture the differences between these two unique assets.
Bitcoin, characterized by high volatility and speculative interest, is a fairly recent invention, born out of the digital age. On the other hand, gold, time-tested over millennia, is a widely recognized store of value and trusted by the largest financial institutions, including virtually all central banks.
Despite their differences, both assets merit consideration for a well-rounded investment portfolio, particularly in an era marked by rising inflation and banking uncertainties. What's more, thanks to the advent of blockchain technology, both of these assets can be owned and traded in the blockchain economy.
In this article, our focus is on tokenized gold. We delve into its safety, examine the associated risks, and explore the various forms in which tokenized gold can be owned. Our goal is to provide a comprehensive understanding of this innovative asset class, enabling you to make informed investment decisions.
The Concept of Tokenized Gold
Tokenized gold combines the time-tested resilience of gold with the transformative potential of blockchain technology. Tokenized gold represents a blend of traditional and modern financial systems. It utilizes blockchain technology. This technology powers cryptocurrencies like Bitcoin, and it also enables the creation of digital tokens that correspond to a specific amount of a physical asset, like gold.
In this case, tokenized gold refers to digital tokens that are directly linked to physical gold stored securely in a vault. For each unit of this 'tokenized gold' that exists on the blockchain, there is a real unit of gold being safely stored. This means that if you own one of these digital tokens, you effectively own a certain amount of gold.
The process begins with the token issuer, who buys a quantity of gold and stores it securely. A corresponding amount of tokens is then minted on the blockchain. Each token represents a specific amount of gold, often one gram, although this can vary between projects.
Most of these tokens exist as ERC-20 standard tokens on the Ethereum blockchain, but exceptions exist. They can be traded on crypto exchanges just like any other cryptocurrency and divided into smaller units, offering flexibility and accessibility to all levels of investors. Some projects even allow tokens to be redeemed for physical gold that can be sent to your house.
Balancing Age Old Stability and Cutting-Edge Innovation
Like all investments, gold-backed crypto currencies come with risks. They could be exposed to potential instability of the project's custodians. A project could be a scam if the claims about gold backing aren't accurate or verifiable.
Gold has been an asset of choice for thousands of years due to its inherent qualities. Its role as a store of value is significant since, unlike fiat currencies, gold is not subject to inflation. In moments of economic uncertainty or instability, gold is known to retain or even appreciate in value, thereby acting as a reliable hedge against inflation.
Moreover, gold's status as a safe-haven asset is well recognized. Investors often turn to gold in times of market volatility, seeking to preserve their wealth. Instances of this trend were visible during the financial crisis of 2008 and the COVID-19 pandemic when gold prices surged. The tangible and finite nature of gold further enhances its allure. With a limited quantity of gold available globally, it holds intrinsic value. Additionally, the diverse applications of gold, ranging from electronics to jewelry, further buttress its worth.
The idea of purchasing gold on-chain, or tokenizing gold, is a relatively recent development that has gained traction alongside the rise of blockchain technology and cryptocurrencies over the past decade. It's a concept that was first actualized by a handful of blockchain companies around 2017.
Tokenized gold offers several advantages over traditional gold infrastructure. Firstly, it is highly accessible and divisible, enabling even retail investors to partake in gold investments, which traditionally required the handling of large physical quantities.
Secondly, tokenized gold simplifies the process of transfer. Transferring traditional gold is a complex process involving transportation, insurance, and security measures. Conversely, tokenized gold, akin to any digital asset, can be transferred instantaneously and at a considerably lower cost.Transparency is another considerable advantage offered by on-chain gold. Every transaction is logged and accessible on the blockchain, providing an unparalleled level of transparency compared to the traditional gold market.
Lastly, as tokenized gold projects mature and garner popularity, they promise enhanced liquidity. These projects pave the way for 24/7 trading, a feature unattainable in traditional gold markets. In sum, while gold-backed cryptocurrencies or tokenized gold do pose their unique set of challenges, they also bring innovative solutions that have the potential to disrupt traditional gold markets. The amalgamation of a time-tested asset like gold with avant-garde blockchain technology forms an enticing proposition for investors.
Understanding and Navigating the challenges of Tokenized Gold
While tokenized gold offers many benefits, it's not without challenges. One key issue is liquidity. Due to their niche status, many gold-backed crypto currencies need higher trading volumes on crypto exchanges, which can make buying and selling difficult.
For instance, if a tokenized gold holder wanted to sell a large amount of their holdings, they might struggle to find enough buyers, potentially forcing them to sell at a lower price than they'd like. Conversely, if someone wanted to buy a large amount of tokenized gold, the limited number of sellers could result in them paying a higher price than the market rate.
Therefore, while tokenized gold offers many benefits like stability, transferability, and divisibility, its potential lack of liquidity can pose challenges for traders and investors. However, as these types of cryptocurrencies become more popular and widely adopted, liquidity could increase, mitigating these issues over time.
Cryptocurrencies were initially designed to be decentralized, meaning that no single entity has control over the entire network. This decentralization is a foundational principle for many cryptocurrencies, providing benefits such as resilience against attacks, censorship resistance, and the removal of intermediaries.
However, in the case of tokenized gold, a certain degree of centralization is necessary. Projects offering tokenized gold often rely on central authorities or custodians to store and safeguard the gold reserves. This creates a point of vulnerability. If the custodian was to fail, be it from mismanagement, fraud, or external factors, the token holders could potentially lose their assets. This central point of failure is a significant departure from the decentralized ethos of cryptocurrencies.
Furthermore, tokenized gold reintroduces intermediaries into a system (blockchain) designed to function without them. In the case of tokenized gold, an intermediary is necessary to guarantee that the digital tokens are indeed backed by physical gold. By reintroducing intermediaries, there's an added layer of complexity and potential risk. The intermediary could act dishonestly or incompetently, which could impact the token holders.
Mitigation of Risks
A key question arises in this context: How do token holders know there's actually gold in the vault? This is where trust and transparency become crucial. The companies offering these tokens must provide a way for token holders to verify that the physical gold backing their tokens does indeed exist and is securely stored.
To mitigate these risks, users should carefully verify the backing claims of any gold-backed crypto currency project. Many projects are transparent about their gold backing and conduct independent third-party audits. Before buying tokenized gold, it’s important to always verify a company’s claims and audits. You want to make absolutely sure that every gold-token is backed 1:1 by physical gold.
You should also ensure that the number of tokens in circulation matches the amount of gold held in reserve. This information can be confirmed through the token contract on the blockchain. Users need to exercise diligence and take certain precautions to ensure that their investments are secure.
Gold Backed Crypto
Paxos Gold (PAXG)
Paxos Gold (PAXG) is a crypto currency backed by real gold reserves held by Paxos, a for-profit company in New York. Each PAXG token is linked to a 1:1 ratio to one troy ounce (t oz) of a 400-ounce London Good Delivery gold bar stored at Brinks Security vaults in London.
The PAX Gold token is built on the Ethereum blockchain, giving it portability among wallets, exchanges, DeFi platforms, and other Ethereum apps. PAX Gold allows users to trade, stake or redeem their tokens for high-quality gold bars. Users can enter their unique blockchain address (0x address) on the website and see exactly the serial number of the physical gold bar that corresponds to the tokenized gold in your wallet. This adds a layer of assurance and proof of asset backing that is often absent in other forms of cryptocurrencies.To buy PAX Gold, you can create an account on a cryptocurrency exchange that supports PAXG, such as Coinbase, Binance, or Wealthsimple, and purchase PAXG on the platform.
Tether Gold (XAUt)
Tether Gold (XAUt) is a digital crypto coin backed by physical gold. Every one Tether Gold is equal to a troy fine ounce of gold, which is backed using physical London Good Delivery (LGD) standard bars.
Tether, the company behind the industry standard USDT stablecoin, has created XAUt to provide an easy and accessible way to invest in gold.
Tether's gold reserves are held in a Swiss vault, and token holders can look up the serial number of their assigned gold bars via Tether's website. Tether also allows investors to physically deliver their gold or redeem it for cash. To buy Tether Gold, you can create an account on a cryptocurrency exchange that supports XAUt, such as Tether Gold's official website or other exchanges like Binance and Kraken.
DigixGlobal is a company that aims to build a stronghold of real-world assets represented as tokens on the blockchain with its proprietary Proof of Provenance (PoP) protocol. DigixGlobal launched one of the first decentralized autonomous organizations (DAO), which the holders of DGD coins would govern. DigixGlobal has created two tokens, Digix Gold (DGX) and DigixDAO (DGD). DGX is a gold backed crypto that is redeemable for physical gold, while DGD is a governance token that allows holders to participate in the decision-making process of the DigixDAO
However, according to DigixGlobal's Twitter account, the company has ceased redemption operations as of March 21, 2023, and its overseas partner, NexusGold FZC, has taken over redemption facilities. DGX is still tradable and redeemable but there is even less liquidity to trade it now that DigixGlobal has ceased operations.
GoldCoin is an ERC-20 gold-backed crypto currency built on the Ethereum network, and it is backed at a ratio of 1000 GoldCoin per ounce of gold. The ERC-20 token allows users to access gold from traditional markets, own, transfer, store, and speculate on gold much easier and faster than in the physical markets.
GoldCoin peer-to-peer cryptocurrency strives for decentralization and economic freedom. GoldCoin can be stored and sent from any Ethereum wallet, and it can be redeemed for physical gold and is regulated by the NYDFS. GoldCoin is widely available on most major Centralized exchanges and Decentralized exchanges.
Meld Gold (MCAU)
Meld Gold (MCAU) is a digital gold asset tokenized using the Algorand blockchain. It is a standard for digital gold that incorporates and empowers the Algorand blockchain, opening up the power of the blockchain to gold assets. Meld Gold ensures the authenticity of the gold backing its digital asset by minting and burning Meld Industry Digital Gold Certificates as physical gold is acquired.
Each Meld Digital Gold Certificate is regulated in Australia and is backed by one metric gram of physical gold, stored in independent vaults. When purchasing gold through Meld, investors secure a trusted industry high liquidity Digital Gold Certificate fully transferable and redeemable for physical gold or AUD at multiple dealers or through their secured delivery service.
Meld Gold assets are accepted by many apps across the Algorand ecosystem, including wallets, DeFi platforms, and the Algorand Wallet also supports Meld Gold. Meld Gold was created in partnership with Algorand and the Australian gold industry to integrate the supply chain of gold into a blockchain.
LODE is a monetary system backed by silver and gold that creates inflation-resistant and transparent financial solutions. It is an initiative to return silver and gold to the monetary system with blockchain technologies. LODE offers a comprehensive suite of financial tools, including the LODEapp Wallet, which allows users to earn a yield on silver and gold, trade popular cryptocurrencies, and hedge their wealth with stabilized currencies.
LODE Tokens serve as a stake in the LODE project, granting holders the opportunity to earn regular rewards through AUX Coins (Gold). With LODE's digital assets, including digital gold and silver, individuals are empowered to manage their monetary portfolios effectively. Furthermore, they can utilize their AGX and AUX holdings in real-time for various financial activities such as purchasing goods, saving, or even conducting immediate trade and commerce transactions.
Perth Mint Gold Token (PMGT)
Perth Mint Gold Token (PMGT) is an ERC20 token developed and issued by Trovio, a tokenized version of GoldPass certificates issued by The Perth Mint. Each PMGT represents one fine troy ounce of physical gold securely stored in The Perth Mint's central bank-grade vaults. PMGT is tradeable on Independent Reserve, transferable peer-to-peer, and enables a smart contract proving the title of gold held at the Perth Mint. The Perth Mint is the custodian of the physical gold, which ultimately backs each PMGT.
You can obtain PMGT tokens through Independent Reserve. This platform allows users to conveniently buy, trade, and hold PMGT on the blockchain, all without incurring storage, transaction, transfer, or management fees. Similarly, Metamask allows purchasing PMGT tokens, creating another convenient avenue to own these gold-backed digital assets. On the other hand, CoinSpot provides a platform for buying PMGT with instant delivery and an easy verification process.
Despite PMGT tokens not being available for trading on Coinbase Exchange, they can be held on the Coinbase Wallet. It's important to note that Coinbase does not control assets held in Coinbase Wallet. The availability of PMGT for purchase may vary depending on the country and the exchange used, highlighting the importance of thoroughly researching your chosen platform.
In conclusion, tokenized gold presents an intriguing merging of the old and the new, providing a blend of the trusted stability of physical gold with the innovative potential of blockchain technology. This unique combination addresses many challenges of handling physical gold, such as transport difficulties and trading interruptions.
However, these ventures have unique challenges and risks, as with any investment. Low liquidity and reliance on central authorities for storing and safeguarding gold reserves may present potential hurdles for some investors. Therefore, it is critical for investors to verify the claims made by these gold backed crypto currencies and to take note of the corresponding amount of gold held in reserve.
Many gold-backed crypto currencies are emerging, each with its unique features—all the platforms mentioned above offer varying acquisition methods and distinct benefits. For instance, some platforms allow their tokens to be redeemed for physical gold, providing an added layer of flexibility.
Moreover, it's essential to understand that while the backing of physical gold provides stability to these cryptocurrencies, they are not immune to risks. Potential instability of custodians, central points of failure and the possibility of fraudulent projects are risks that potential investors must consider.
Despite these challenges, the union of gold and blockchain technology opens up exciting possibilities. It grants unprecedented access to gold investment for all levels of investors and bridges the gap between traditional investment methods and the growing digital economy.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.