Gold-backed cryptocurrencies have become a viable option for investors in recent years. While it might be challenging to invest in physical gold, it is easier to go for these cryptocurrencies. So, what is gold-backed crypto?
Gold-backed crypto is a token tied to a specific gold value size. These assets are similar to stablecoins pegged to the value of a fiat currency, such as the US dollar. This correlation between crypto and precious metal is to control price volatility.
It means that gold is stored in reserve as collateral for every unit of that particular cryptocurrency. Keep reading this article for more information about these cryptocurrencies.
A Brief History Gold-Backed Money
Backing currencies with gold did not start with cryptocurrencies. It began in the early 1870s. The gold standard monetary system: started with fiat currencies.
The system placed the value of a country’s currency on a specified quantity of gold. So, a specific amount will be kept in gold reserves for every currency unit.
The gold standard is now largely extinct, as Great Britain abandoned it in 1931 and the United States in 1933. The gold standard aimed to counter the effects of inflation and deflation in an economy.
However, the gold standard ultimately failed since it is difficult to match its supply with the ever-present demand.
Gold-backed Cryptocurrency, What Is It?
Gold-backed crypto is an asset with the same value as physical gold. The value of the cryptocurrency correlates with gold's current price in the market. These cryptocurrencies have gold reserves matching the circulating supply. The assets have gained popularity since the value of gold is relatively stable.
This gold backing prevents sharp price corrections that other cryptocurrencies without backings suffer. Investors use them to hedge their funds against inflation, just like the stablecoins concept.
Investors can trade crypto backed by gold like others on exchanges and use them for transactions. The investors also reap dividends whenever the price of gold increases. They can also exchange gold-backed cryptocurrencies for solid gold of equivalent value.
How The Gold-Backed Cryptocurrencies Work In The Market
A centralized issuer dispenses gold-backed cryptocurrencies. The gold backing can be in the form of gold bars, coins, certificates, and securities. These tokens represent proof of ownership for the crypto assets.
A gold cryptocurrency operates in two ways. It is either pegged to the price of gold or redeemed as physical gold. However, physical redemption is unlikely due to counterparty risk.
Most of these gold-back cryptocurrencies exist as tokens on a public blockchain. Developers mostly build them on the Ethereum blockchain using the ERC-20 token standard. However, others exist on a different blockchain, such as Algorand.
These cryptocurrencies are also tradable on exchanges like others.
The Main Benefits Of Backing Currencies With Gold?
The benefits of gold-backed currencies include stability, ease of transactions, access to ETFs, and decentralization.
Stability
Gold-backed crypto is relatively stable in price. Even a general crypto market price slump will not affect their value since it is tied to gold. They serve as a good store of value for hedging funds during a volatile market phase.
Ease of transaction
Another major advantage of investing in gold-backed crypto is its transferability. Unlike real gold, which is heavy and risky, these investments are digital. Users can transport and transfer them among themselves through blockchain technology.
Access to ETFs
Some gold-backed crypto assets offer users access to ETFs as an added benefit. ETFs are used to monitor the price of tokens and are traded daily. With this, investors can further diversify and make more profit.
Decentralization
This feature is one of the main goals of any cryptocurrency project. Traders can invest in gold and trade their tokens easily without centralized authority regulating their transactions. Instead, they can make these trades on decentralized exchanges through their wallets on the exchange.
Main Disadvantages Of Gold-backed Currency?
Crypto scams, gold price correlation, and low liquidity are some significant drawbacks.
Crypto scams
Gold-backed crypto thrives on the assurance that a gold reserve is backing its tokens. However, there is a possibility that disreputable companies can easily take advantage of unsuspecting customers.
While some organizations have proven themselves over time, a few need to be more transparent financially. Investors must conduct proper research for third-party audits on the project they wish to invest in.
Gold price correlation
Since these cryptocurrencies are pegged to the price of gold, it means that if gold prices crash, they will also crash. While this might not occur frequently, it is still a possibility.
This was the major reason fiat currencies like the US dollar discarded the gold standard. A major downtrend in gold prices will lead to economic instability and chaos.
Low liquidity
Some gold-backed cryptocurrencies struggle with low liquidity. This problem is due to their small investor base since they are not traded on crypto exchanges. This makes the buying and selling process difficult for investors.
A high level of trust is required.
One of the problems with crypto projects over time is trust issues. Investors believe their assets are backed by gold. However, there might not be any means to verify these claims, making it a trust-based investment fraught with uncertainty.
Standard Cryptocurrency vs. Gold-Backed Counterpart
Cryptocurrencies created faster means of carrying out transactions and other advanced innovations. However, over time, investors have expressed fears over the durability of projects like bitcoin since it has no backing.
The gold-backed crypto assets emerged to solve this problem, with the proof of gold in reserve for the cryptos. Moreover, this backing creates assurance among some investors, since gold has been a trusted store of value.
Gold’s long history in the financial market affords experts the luxury of making price predictions based on past performance.
Although stability is a great benefit of gold-backed cryptocurrencies, they might offer investors little gain. However, Bitcoin and altcoins can have sudden price corrections, leading to exponential gains for traders.
However, for gold-backed crypto tokens, they remain the same, except the price of gold increases or decreases.
TOP 10 Gold-Backed Crypto Assets
Gold-backed cryptocurrencies are now gaining more popularity in the crypto space. This list comprises the top 10 gold-backed crypto tokens.
Tether Gold (xAUt)
This project allows investors to invest in real gold at its current market price. In addition, it is affordable for small-scale investors since the investment size can vary. Tether gold is created by the producers of Tether (USDT).
The difference is its gold backing compared to Tether stable coin’s dollar backing. The Tether Gold project is well-detailed, as token holders have ownership rights for specific gold bars. These bars are identified and differentiated by serial number, weight, and purity.
Investors can check on their gold bars and ounces of gold owned per bar using a dedicated website.
Key features
- 1 xAUt token is equivalent to 1 Troy fine once gold on a London Good Delivery bar.
- Investors must sign up and open an account on app. tether, then verify the account to be able to purchase xAUt tokens. All purchases are in US dollars.
- Tokens are transferred between unchained Tether wallets.
- These tokens are also redeemable as gold, and users can sell them. The cash realized from the sale is transferred to the user.
- Users can store the tokens as ERC-20 tokens on an Ethereum-based wallet and as TRC-20 tokens on the Tron blockchain network.
- The gold can also be delivered to users within Switzerland.
Paxos Gold (PAXG)
Paxos, the creators of the crypto exchange itBit, issues this cryptocurrency. The New York State Department of Financial Services regulates the platform, and it is popular among investors.
Using the ERC-20 token, users can access gold in the financial markets. They can also transfer, own, and store gold. Digital assets make the process much easier than the traditional gold trading process.
Gold holdings are also subdivided for better management. Users can also trade the gold as futures with the option of either perpetual or quarterly futures contracts on exchanges.
Paxos Gold has origins in Singapore but is now popular globally.
Key features
- Supports instant settlement.
- It is backed by one fine Troy ounce of gold, with a ratio of 1:1.
- There is no custody fee for the tokens. Gold ETFs are also available in the range of 19 and 40 basis points per year.
- It offers users access to major gold ETFs in other tokens.
- Available on most of the major exchanges.
- It can be redeemed as physical gold.
DigixGlobal (DGX)
This project helps potential investors in physical gold that do not have enough money to purchase a full-size bar. It also helps with storing this precious metal to prevent potential risks.
With DigixGlobal, investors can invest in fractional tokens and transfer or redeem them when they want. On the platform, investors can accumulate gold in small holdings and manage them constantly without issues.
Gold ETFs are also available using this token. Investors can trade the tokens on cryptocurrency exchanges. Its physical gold reserves are in two locations – Canada and Singapore.
The gold custodians are also insured by the Bullion Association.
Key features
- DGX tokens can be purchased with the cryptocurrency after registering and choosing your wallet.
- No storage fee for tokens. ETF storage fees are 0.4% each year, while the physical gold bar is 0.6% yearly.
- Transaction fees for sending tokens are 0.13% per transaction, and the token conversion fee (recast) for gold is 1%.
- One DGX token is equivalent to 1 gram of gold. All the gold is backed by 100g Swiss gold bars from some of Switzerland's top refineries.
- It operates on the Ethereum Blockchain.
- Investors can store it on Metamask and other Ethereum-based wallets.
Perth Mint Gold Token (PMGT)
This is a tokenized version of the GoldPass certificate at a 1:1 ratio. It is also backed by physical gold at a 1:1 ratio. Each of the certificates is valuable to trade in exchange for tokens. These tokens can, in turn, be traded for certificates and fiat currencies on digital exchanges.
Perth Mint’s central bank is the custodian of their physical gold reserves, and the Government of Western Australia guarantees it. The token is easy to transfer and easily divisible.
Also, investors can convert them to gold or its equivalent value in fiat currency at any time. The ability to convert to fiat currencies gives it access to liquidity for large-volume trades.
It does not have storage, management, or transaction fees. It is affordable and popular in crypto circles.
Key features
- 1 PMGT is equivalent to 1 one GoldPass certificate and an ounce of solid gold.
- Tokens can be traded at the over-the-counter (OTC) gold markets.
- Investors can redeem the tokens as various Perth mint products. These products can be the small 1-ounce cast bar or 400-ounce LBMA – which the London Good Delivery bar accredits.
- Perth Mint publishes all balances of GoldPass accounts. This means that the public can easily verify the gold backing of the token.
GoldCoin (GLC)
The aim of this gold-backed peer-to-peer cryptocurrency is decentralization and economic liberty. The developers of this project placed utmost priority on economic speed and transactional confirmation speed.
The confirmation speed is just two minutes, making it faster than most other cryptocurrencies. Users can store the tokens on the Ethereum blockchain as ERC-20 coins for easy transfer with an Ethereum wallet.
The crypto backing is in a ratio of 1000 GoldCoin for each ounce of gold. It provides stability and the benefits of digital assets. It is easy to divide and transfer from one user to another. Investors can also convert the tokens back to physical gold or fiat currencies.
It is available on exchanges and the company website, and you can purchase the token from ATMs.
Key features
- It is mined using the proof of work algorithm, similar to bitcoin.
- Each Goldcoin token is worth 1/1000 of a gold ounce.
- The platform uses the on-chain and off-chain scaling methods for scaling.
- Has a two-minute transaction confirmation time, which is one of the fastest in the financial sector.
- Easy to divide and transfer tokens between users.
Meld Gold by Algorand (MCAU)
Meld Gold also creates gold investment opportunities for small-scale investors. It supports gold transactions in real time and removes the risks associated with acquiring physical gold.
Each of the tokens represents Meld Digital Gold Certificates in a digital form. These certificates are backed by physical gold. Users can store and monitor the tokens in an Algorand wallet. This decentralized storage is advantageous to investors who can hold the tokens anywhere in the world.
The Meld Gold token, to an extent, protects investors from high inflation obtainable in regular crypto markets. It also optimizes transaction speed, making it preferable over the physical gold trade.
Key features
- Algorand, the technology behind Meld Gold, supports atomic swap and standard asset tokenization.
- Users can purchase them directly from Meld partners or through over-the-counter markets.
- Investors can convert the tokens to fiat currency, gold certificates, and physical gold.
- Storage is decentralized.
- It supports investments in small amounts.
AurusGOLD (AWG)
This gold-backed token is collateralized and can be redeemed for a gram of 99.99% gold from LBMA certificate refineries.
It offers users more stable investment opportunities in gold. Gold traders mint it to profit from arbitrage. Arbitrage is buying at a lower price in a market and selling at a higher price in another market simultaneously.
The gold traders, arbitrage between the AWG and bullion gold markets, relate the price of Aurus GOLD with the spot price.
Key features
- It is easily converted to physical gold from LBMA refineries.
- AWG is easy to accumulate with small increments of 1 gram.
- Gold traders mint it to profit from the difference in the price across markets.
- Offers investors a safer option than normal cryptocurrencies.
CACHE Gold (CGT)
This token successfully merges gold’s outstanding qualities with the blockchain. The tokens are redeemable and possess sufficient liquidity. Each of the tokens is equivalent to a gram of pure gold.
It offers users faster transaction settlement times and has a solid network infrastructure. As added benefits, investors in CACHE Gold have access to GramChain, an asset tracking system.
This system provides gold bar locations in real-time, photographs, and gold-held serial numbers.
Key features
- There is sufficient proof of the gold backing with photographs and real-time locations.
- Each token represents physical gold in increments of 1 gram.
- Fast transaction times.
- Sufficient liquidity is available for investors.
Cash Telex (CTLX)
Cash Telex gold has gone a step further with its crypto backing. They are diversified into gold, diamond, silver, and real estate funds. Each of the gold coins represents one gram of securely bonded gold.
The gold held by the company is audited and fully insured. It is also open to the public for verification.
Key features
- All reserves are transparent, regulated, and verifiable.
- Cash Telex offers users gold coins in 1-gram increments, making it easy to accumulate.
- They offer a wide range of tokenized assets that include gold, silver, diamonds, and real estate funds.
AABB Gold Token (AABBG)
This is one of the new gold-backed crypto projects to emerge. It supports a mine-to-token gold backing technology that preserves the existence of these tokens in the digital space.
All of AABB Gold Token’s physical gold holdings are verified. The assets that back the tokens are all from the company’s production section.
Key features
- The tokens represent physical gold reserves held by the parent company.
- The gold is publicly verified.
- It uses a mine-to-token gold backing procedure.
Bottom Line
Gold-backed crypto is a token with gold assets backing. These cryptocurrencies serve as a store of value and protect investors from extreme market volatility. Also, they offer faster transaction times and give users access to trading gold in smaller fractions.
However, the downsides include scam projects, the possibility of the gold price crashing, and low liquidity, among others.
Also, gold-backed crypto might not yield substantial gains for short-term traders since the price is relatively stable. With numerous gold-backed crypto projects to choose from, it is down to personal choice and preference.
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FAQ – Common Questions About Gold-backed Crypto
Find more answers to clarify further areas of confusion on currencies with gold backings.
Which gold-backed cryptocurrency is the best?
Tether gold (XAUT) is one of the cryptocurrency market's best and most popular gold-backed stablecoins. It allows investors to invest in gold without a huge amount of money. It has a 1:1 ratio to the troy ounce of gold on a London Good Delivery bar. Also, investors can access exchange-traded funds (ETFs) and other financial assets in the traditional markets.
Is it safe to invest in gold-backed crypto?
Gold-backed cryptocurrencies are safe as they allow investors exposure to gold by creating stability in their investment without physical storage or owner. Each investor of a gold-backed crypto asset gets a serial number corresponding to the physical gold bar backing the asset.
Hence, the tokens serve as a hedge against inflation for investors, protecting them from loss of cash.
Which cryptocurrency is linked to gold?
The major crypto assets tied to gold are usually ERC-20 tokens. They are mainly developed on the Ethereum blockchain and storable in suitable wallets that support ERC-20 coins.
Also, investors could conveniently trade the assets on crypto exchanges.
