Global uncertainty caused by events like the COVID-19 pandemic, political instability, and military conflict has further increased the desire to invest in stablecoins that are pegged to a reliable asset like Fiat currency or precious metals like gold and silver.
Even though investing in gold sounds intuitive, only 10.8% of Americans own gold according to a recent survey. An estimate of global gold holdings shows that less than 20% of the total share is represented as investments.
There is a growing interest in investing in gold-backed cryptocurrency. If you are looking for some gold-backed cryptocurrency, you’ve come to the right place. Our ultimate guide to gold-backed cryptocurrencies will give you an idea about what it is and maybe even help you choose some tokens to start investing in. Read onwards to learn more.
A gold-backed cryptocurrency is a digital asset derivative whose value is supposed to be underwritten by the equivalent price in gold. Each gold-backed cryptocurrency defines one of its tokens as having an equal worth of a specific size of gold, be it grams or Troy ounces.
As the term suggests, gold-backed cryptocurrencies are crypto coins that have a value paired with gold. Each coin represents a fixed value of gold, and ownership of the coins translates to ownership of the corresponding amount of gold. It’s like the gold standard USD before 1971 but replacing the fiat currency with cryptocurrency. The company keeps a store against the coins issued in a physical vault. Customers can redeem physical gold by trading the required amount of tokens.
A single gold crypto token can be pegged to 1 gram of gold like DigixGlobal’s DGX coin. Others like AurumCoin are pegged to one ounce. Blockben offers 1 Blocknote (BNO) coin for every 0.1 gram of gold.
The way assets are backed may differ for each company, but the standard process is to keep a fixed supply of gold deposits in the form of bars and coins. The physical gold is purchased from LBMA suppliers. Some companies like Blockben purchase equivalent amounts of gold against the purchased cryptocurrency asset of an account holder.
An interesting fact is that Gold-backed digital currency is not a new thing. 13 years before the launch of the original Bitcoin network, E-gold was launched in 1996, allowing people to buy a digital currency that was backed by real gold assets.
By the early 2000s, E-gold had already figured out how to work on contracts with customers. However, this company folded well before the Bitcoin era. It would take several years for gold-backed cryptocurrency to make a resurgence.
The first blockchain-based gold coin offering was AurumCoin, launched in 2014. AurumCoin was based on the SHA256 Bitcoin algorithm, with each coin being backed by 1 oz of pure gold after all the coins have been distributed. This was the first case of a gold-backed cryptocurrency being pitted against Bitcoin, and the backers made sure to pitch its comparative strengths to potential buyers.
First, gold is a precious metal, and has been used as a currency standard for millennia. This precedent makes it easy to understand for customers like the average joe. From a marketing and PR perspective, that’s an easy position to establish.
That’s what the UK’s Royal Mint was also betting on when it decided to launch its gold cryptocurrency project. That was promptly stopped due to uncertainties that are part of crypto. It still sells DigiGold, though.
Gold has a stable value. It is a rock solid (no pun intended) choice against inflation. Its value does not swing too much like Bitcoins. Investors can keep their funds safe in the form of gold. As Theirry Arys Ruiz, CEO of AgAu, puts it, gold-backed cryptocurrency is superior money over standard cryptocurrency.
Gold-backed cryptocurrencies create more opportunities to use gold as a medium of exchange. It is an acceptable store of value for many financial institutions. Buyers can access the tokens from anywhere around the world, reducing the barriers to entering the gold market. For anyone low in funds, cryptocurrency offers them a chance of investing in a fraction of a coin to stake their finances in an equivalent amount of gold in the company’s holdings. Therefore, the tokens offer an alternative option for liquid assets.
Since they are cryptocurrencies on a blockchain, customers can have 24/7 access to their assets through their mobile or computer devices. Developers can also implement tight cybersecurity safeguards for customers, to keep their accounts safe. Since many gold-backed cryptocurrencies are based on the Ethereum blockchain as ERC-20 tokens, they offer DeFI capabilities, opening new investment opportunities for token owners.