Gold is a precious metal used in many industries, but it is also a well-known investment product and a historical hedge against economic turmoil and inflation. Widely considered a risky asset, the price of gold performs best as an investment in a challenging financial environment during times of crisis, war, recession, etc. For this reason, in this article, we decided to introduce some gold backed currencies for investment. First, let us tell you what is gold backed cryptocurrency.
What is gold backed cryptocurrency?
Stablecoins are stable digital currencies whose price is fixed in the digital currency market. Stablecoins operate based on various assets such as fiat currency (for example, the US dollar), other digital currencies or precious metals, or a combination of all three. So Stablecoins will divide into two categories: centralized stablecoins and decentralized stablecoins.
Gold backed cryptocurrency is a derivative asset that allows users to invest in the precious metal without having to worry about physical storage and custody of gold. Gold-backed digital currency addresses the concerns of portability, transferability, as well as associated illiquidity.
In the traditional world, gold-backed cryptocurrencies correspond to gold ETFs and CFDs that track the price of gold without physically owning it.
Numerous digital currencies will connect to gold in one way or another and will support in different proportions depending on the project itself.
An overview of the gold backed currency and its features
Developers interested in creating a gold backed currency since the early days of the industry. Gold-backed digital currency links a token or coin to a specific amount of gold (for example, 1 token equals 1 gram of gold). Gold, like dollars or other fiat currencies, must usually hold by a third party.
One of the advantages of a gold-backed cryptocurrency is that the base or minimum value of the token will always equal fix amount of gold. If the digital currency in question becomes popular, the price of the coin can exceed this value. In this way, gold backed cryptocurrency offers protection against the decline in the value of a digital currency.
On the other hand, gold-based cryptocurrencies also carry risks. Blockchain is a very secure network for tracking transactions in digital currencies. However, the concern of storing large amounts of physical gold is a concern with gold-backed cryptocurrency. Therefore, investors should check who is holding the gold for a particular cryptocurrency and were before investing. If the gold disappears for any reason, the value of the token will also drop drastically. Transparency between cryptocurrency developers, gold holders, and investors is critical to building investor confidence and, in turn, the valuation of the cryptocurrency in question.
Gold backed cryptocurrency advantages and disadvantages
Like any other financial market, investing in gold backed cryptocurrency has its pros and cons. In the following, we will have a closer look at its advantages and disadvantages.
Gold backed cryptocurrency advantages
First of all, most gold-based cryptocurrencies will build as tokens that operate on the ERC-20 token standard and are therefore easily transferable and tradable across multiple centralized and decentralized exchanges.
Another advantage of gold backed cryptocurrency is that it can split, allowing investors to own smaller tranches and not necessarily requiring a large amount of money to invest in gold.
Gold-backed cryptocurrency also has other benefits that will associate with digital currencies. Unlike physical gold, gold-backed cryptocurrency can easily store and transfer.
Gold-based cryptocurrencies can potentially purchase through decentralized exchanges. Hence, traders can buy them without any KYC criteria as compared to CFDs and ETFs.
Gold backed cryptocurrency disadvantages
Gold backed cryptocurrency is a derivative asset and therefore carries risks. One of the disadvantages and risks of gold-backed cryptocurrencies is that investors do not necessarily directly own the gold to which their tokens will attach, although this may be different in certain projects that allow for physical redemption.
Furthermore, gold-backed cryptocurrencies rely on centralized service providers that manage the storage of physical gold that backs the tokens, which will be completely out of the hands of investors.
Since most gold-backed cryptocurrencies are ERC-20 Ethereum-based tokens, you may incur high Gas fees for each token purchase or transfer.
Compared to CFD contracts, gold-backed cryptocurrencies are much less liquid because their market is much smaller compared to the old currencies.
Introducing 8 gold-backed currencies
Several gold-backed cryptocurrencies are popular among investors. These cryptocurrencies will issue by well-known companies with a history in this field and have a high trading volume.
Popular gold backed currencies
Paxos Gold (PAXG)
As of March 2022, PAXG was the largest gold-backed cryptocurrency worth around $550 million. Also, this digital currency had the highest volume of daily transactions.
According to the project’s official white paper, each PAXG token represents one ounce of physical gold. This token will create through Ethereum’s ERC-20 token standard and is easily portable across the network.
It is also worth noting that Paxos Trust Company is the issuer of PAXG, a regulated financial institution. It is a state-licensed firm regulated by NYDFS, the New York State Department of Financial Services, and must meet the highest standards when it comes to protecting client assets.
Tether, the company behind the most widely used stablecoin (USDT), has launched a new digital currency with the symbol XAUt. This token, which is based on Tron’s ERC-20 and TRC-20 standards, will represent one ounce of gold.
XAUt investors can acquire gold ownership rights on specified gold bullion. Their allocation can identify through a unique serial number, weight, and purity.
According to the documentation, XAUt holders allow checking their gold bullion details with their address anytime through the website.
To request redemption in physical gold, users must complete the TG Commodities Limited verification process. This company issues tokens. Otherwise, this token can trade on some popular cryptocurrency exchanges such as FTX and Bitfinex.
PMGT is one of the few digital currencies approved by the US central government. The currency will back by physical blocks of gold at a 1:1 ratio and has a market capitalization of $2,212,088. Investors will give a digital gold certificate every time they buy the token. These certificates can trade for gold bullion which delivers directly to their address.
During the transaction, investors will not require to pay any transaction fees. In addition, they do not need to pay storage fees or ongoing management fees.
The token can only purchase on Independent Reserve, although negotiations are underway to list PMGT on other exchanges.
GLC is an ERC-20-based token developed by Digital Gold LTD. This gold-backed cryptocurrency is built and maintained by a group of volunteers who believe in promoting economic freedom.
GLC investors have access to unique features such as a two-minute confirmation speed, which is the fastest transaction of any gold backed cryptocurrency.
GLC also offers an exclusive GoldCoin wallet for every gold purchased and charges no transaction fees, making it very easy for investors to buy and hold gold.
Digix Global (DGX)
DigixGlobal is a Singapore-based company offering DGX tokens backed by gold. The DGX token supports a 1:1 ratio and has a market capitalization of $1,183,867. Each token represents 1 ounce of gold.
The gold will store in Singapore and Canada, which has a unique added value compared to other gold-backed tokens on this list. Having two storage points in the world reduces the risks of storing in a single location.
DigixGlobal charges a 1% fee per transaction and covers the demurrage (shipping) cost. The only cryptocurrency exchange that currently lists this token is Coinsquare, which can purchase with Bitcoin (BTC) or Ethereum (ETH).
Meld Gold Algorand (MCAU)
This token makes gold investments available to investors in the form of Meld digital gold certificates. Each gold certificate is equivalent to 1 gram of physical gold.
In this system, tokens will store securely in the Algorand wallet and are easily accessible to investors who already have a wallet. Meld launched a partnership program to attract leaders in the gold, financial markets, and technology sectors to collaborate and brainstorm ideas about the future of the token.
AABBG is somewhat of an anomaly in the cryptocurrency space as the founding company has no prior experience in cryptocurrency or finance. Unlike other gold-based cryptocurrencies where gold will obtain from multiple sources, 100% of the gold purchased using AABBG comes directly from the company’s mining project. This cuts out the middleman and ensures that investors receive their gold directly from the source.
The current market value of this token is $97,382,859.21. This token can only purchase using the official AABB wallet and requires Bitcoin or Ethereum to complete the transaction.
AurusGOLD, better known as AWG, will trade by gold traders who arbitrage between the AWG and bullion markets. The market value of this token is $1,880,988.
Each token can redeem for 1 gram of gold supplied from London Bullion Market Association (LBMA) certified refineries. Investors can purchase tokenized precious metals in the same way as gold-based tokens and hold them in their cryptocurrency wallets.
AWG can purchase at several Aurus partner exchanges. The most popular CEX.IO exchange and precious metal dealers include Direct Bullion and Aurica Group.
Investing in physical gold is not that safe despite its reputation. Gold backed cryptocurrency makes it much easier for people to hold gold without the need for storage.
As a cheaper and more convenient alternative, we may one day see gold-based tokens become the new dominant form of gold ownership for a global, decentralized base of people. However, the future of gold-based tokens may look quite different.
For example, various decentralized finance projects and decentralized exchanges allow people to earn interest on their gold deposits through various mechanisms, such as lending or liquidity pools.
Some pilot projects even create synthetic assets that derive their value algorithmically rather than basing it on physical deposits of assets.
So, getting information about these new investment methods, including gold backed cryptocurrency, is very important for the future.
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