2020’s been a renaissance for the cryptocurrency world. January 2020 brought a surge for virtual currencies amid expansion for the Bitcoin derivatives market.
Market fluctuations due to COVID led to crypto prices dipping and rising over the next several months. Still, sustained turbulence has led many to express an interest in cryptocurrencies as an alternative to traditional financial markets.
Searching For Stability
Upstart cryptocurrencies like Chainlink or Crypto.com Coin have made waves in headlines and now rest in the top 10 cryptos by market capitalization, next to giants like Bitcoin, Ethereum, and XRP.
Another popular type of cryptocurrency making new headway in the eyes of investors is gold-backed coins. The concept of cryptocurrencies backed by physical bullion is not new. The first gold-backed virtual currency was actually launched in the 1990s.
A number of gold-backed cryptocurrencies have come to public attention over the past couple of years, including Perth Mint Gold Token (PMGT), DigixGlobal (DGX), and GoldCoin.com.
How Can Crypto Be Backed By Gold?
The basic concept of gold-backed cryptocurrency is alluring to many. A token or coin is released that directly represents a value of gold. The physical gold is stored, verified, and managed by a trusted third party.
One of the advantages of gold-backed crypto is that the digital coin’s value will always equal at least the physical value of gold bullion.
However, if the cryptocurrency starts to become popular, the coin might eclipse the value of physical gold. If prices slide, investors have the relief of knowing the value of the coin will not dip below gold’s spot price.
The Most Well-Known Gold-Backed Cryptocurrencies
Many interested in investing in gold-backed cryptos do not know where to start. There are a variety of options. Some coins might not have the auditing standards to prove they maintain control over physical gold reserves to underpin digital coins.
One of the most popular cryptocurrencies backed by gold is the Perth Mint Gold Token (PMGT). This cryptocurrency is validated by gold stored in the Perth Mint of Western Australia.
The mint issues digital certificates via an app, and the Australian Government backs the validity and weight of gold reserves. PGMT is popular among investors because the amount of gold backing each coin can be verified in real-time.
Holders of some other gold-backed cryptocurrencies have to wait for monthly audits to rest assured their tokens are backed by physical gold. However, liquidity for PGMT is somewhat limited even though coins are fully redeemable for bullion.
Other well-known gold-backed cryptocurrencies include:
DGX coins each represent one gram of gold stored in Canadian and Singaporean vaults. DigixGlobal creators desired to make access to gold more democratic by constructing the token to make gold bars divisible and transferrable.
PAX Gold (PAXG)
Paxos, operating as a New York State Trust Company, issues coins backed by an ounce of gold stored in Brink’s vaults. Ownership belongs to the token holder, while Paxos maintains physical custody of the gold. The coin’s creators launched it as an ERC-20 token on Ethereum.
Tether Gold (AXUT)
Tether’s a company with a colorful history. Each XAUT is backed by a troy ounce of gold on a London Good Delivery gold bar. Reserves are stored in Switzerland, and holders can see the serial number of gold bars from Tether’s website. Users can track transactions on block explorers as tokens are based on the Ethereum and TRON blockchains.
Savvy Investing Into Cryptocurrencies Backed By Gold
So far, gold-backed coins still represent a relatively small portion of the pegged crypto market, as USD-backed coins remain dominant.
Those interested in investing should be wary about some of the promises some purported gold-backed coins make.
Some projects might claim to have false reserves of gold to attract investor dollars. Last year, German officials ordered the Karatbars crypto company to cease operations amid allegations it was running a pyramid scheme.
The platform claimed to offer “cryptnotized gold” tokens, backed with a purported Miami crypto bank and a mine in Madagascar containing millions in gold reserves. Both assertions did not stand up to investigative scrutiny.
The company featured former soccer stars Lothar Matthaus, Roberto Carlos, and Patrick Kluivert as promoters, underpinning the importance of not always taking a ‘big name’ endorser as a sign of legitimacy.
Prospective investors should research gold-backed cryptocurrencies and only pick options where physical gold reserves are verifiable and audited.
The project should also comply with any pertinent banking or securities laws (especially if in the United States).
The Future For Gold-Backed Cryptocurrencies
There are a growing number of cryptocurrencies backed by gold.
The market only looks to expand as turbulent financial conditions due to COVID increases interest in stablecoins and other financial tools to hedge against volatility.
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