Understanding Gold-Backed Cryptocurrencies
A gold-backed cryptocurrency is a type of digital asset that derives its value from an equivalent amount of gold.
Each token of a gold-backed cryptocurrency represents a specific quantity of gold, typically measured in grams or troy ounces.
The cryptocurrency issuer ensures that the physical gold equivalent to the tokens is held in reserves or custodian vaults.
Bridging Cryptocurrency and Tangible Value
Some gold-backed tokens even offer the option to redeem the tokens for actual gold.
Unlike most cryptocurrencies that have value driven by speculation, the value of a gold-backed token is tied to a tangible asset, which provides stability and reduces the impact of price volatility.
Most gold-backed cryptocurrencies are built as ERC-20 tokens on the Ethereum blockchain, although exceptions like Paxos’ PAX Gold exist.
A Hedge Against Fiat Currency Weakness
Investors are increasingly drawn to blockchain-based digital assets backed by gold and other scarce commodities as a means to hedge their portfolios against weakening fiat currencies or stablecoins subject to regulatory risks.
One advantage of digital gold over physical gold is its divisibility. Digital gold can be divided into smaller units and easily transferred between parties.
Gold-backed currencies have faced challenges in the past, including:
- Low liquidity as they are typically traded on fewer exchanges compared to other cryptocurrencies.
- Verification of reserves involves confirming whether the company or custodian actually holds the claimed reserves of gold.
- Reliance on central parties for collateral storage and auditing goes against cryptocurrencies’ decentralized nature. Decentralization is a crucial characteristic of cryptocurrencies.
Currently, some of the leading gold-backed cryptocurrencies are:
- Paxos Gold (PAXG)
- Perth Mint Gold Token (PMGT)
- Digix Global (DGX)
- Tether Gold (XAUT)
- Meld Gold by Algorand