In recent years, investors have been exploring new ways to diversify their portfolios. Gold-backed cryptocurrencies have gained popularity, offering fast transactions and protection against inflation.
What Are Gold-Backed Cryptocurrencies?
As the name suggests, gold-backed crypto is a digital asset backed by actual, physical gold. Investors can hold these alternative investments and watch them grow along with the market price of gold. Unlike traditional stocks and cryptocurrencies, gold-backed cryptos tend to be less volatile and not prone to dramatic price swings. You can buy and sell this type of crypto on exchanges, and many online vendors also accept it as payment.
How Do They Work?
When you purchase gold-backed cryptocurrency, you receive a unique serial number corresponding to a real unit of physical gold stored in a secure facility. Banks and third-party custodians handle the security and storage of the physical gold. By utilizing cryptocurrencies, you can trade the tokenized gold without worrying about the expensive logistics associated with physically storing and transporting the actual gold. Most gold-backed cryptos have a one-to-one ratio of tokens to gold reserves. In other words, one token typically equals one ounce of gold, depending on which crypto you choose. Many gold-backed cryptos use Ethereum’s ERC-20 standard tokens, but you can explore other exchanges if your digital wallet doesn’t accept that token type.
A Brief History
Investing in tangible assets like physical gold has long been a way to create a financial safety net during economic downturns. For thousands of years, cultures around the world have mined gold for status, jewelry trades, and developing technologies. As a result of its rarity, durability, and universal recognition as a valuable commodity, gold became a universally reliable and sought-after asset. In the mid-1800s, the UK and US created fixed-rate currencies backed by gold to support the growing international economy. Although the US ended its gold and silver-backed dollar in the 20th century, investors continued trading and storing physical gold to reinforce their portfolios against market crashes. As mainstream crypto exchanges emerged in the early 2010s, investors could now manage and trade their gold assets faster than ever.
Some Popular Gold-Backed Cryptocurrencies
Tether Gold (XAUt), Digix Gold Token (DGX), Pax Gold (PAXG), Perth Mint Gold Token (PMGT), and GoldCoin (GLC) are some popular options, each backed by real, physical gold reserves held by their respective issuers or custodians. Each has its own features in terms of pricing, purchase minimums, storage, and redemption policies.
Things to Consider Before Investing
Determine your investment budget, as trading gold-backed crypto can be expensive depending on which one you choose. Understand that not every crypto comes with a gold-redeeming guarantee – you’re placing trust in central custodians to properly manage stored gold reserves. Regulations and laws could also change suddenly, so it’s wise to diversify rather than putting all your eggs in one basket.
Advantages of Gold-Backed Cryptos
The key advantages include:
– Reliability (value tracks actual gold prices)
– Transferability (easy buying/selling)
– Scam prevention (blockchain transparency)
– Cost efficiency (no storage/transport fees)
– International validity (can trade globally)
Risks Involved
Some risks to be aware of:
– Centralized governance (goes against decentralized ethos of crypto)
– Conversion costs (for redeeming physical gold/cash)
– Low volume (limited amount of gold in existence)
Growth Potential
In 2022, the gold-backed crypto market cap hit $1 billion, with PAXG contributing around $500 million. Experts expect steady growth for PAXG and XAUt in the coming years, though global events make forecasting difficult.
Security and Auditing
After recent SEC crackdowns on crypto scams involving gold-backed tokens, security and auditing are crucial:
– How is the security of the stored gold reserves ensured by the issuers or custodians?
– What auditing and transparency measures are in place?
– How are fraud and counterfeit issues prevented?
Reputable exchanges have protocols to address these concerns.
How to Invest
You can buy and sell gold-backed cryptos on major exchanges like Binance, Kraken, Bitget, and others once your account is verified. Hire an investment advisor if you’re new to trading gold-backed assets.
Regulations
Most reputable gold reserves undergo routine government audits. However, expect tighter regulations on gold-backed cryptos in the future as authorities crack down on illegal activity in the crypto space.
The Takeaway
Exploring gold-backed crypto offers new investment opportunities, but it’s important to understand the risks and rewards before getting started. Do your research, consider working with professionals, and make sure this type of investment aligns with your financial goals. Another risk investors should be aware of is the spread of FUD (what does FUD stand for?) in the crypto space, which can create unnecessary fear, uncertainty and doubt about certain projects or assets.
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