Some cryptocurrency enthusiasts are turning to gold-backed cryptocurrencies to give themselves a sense of security amidst turbulent economic markets.
CoinShares Chief Investment Officer Meltem Demirors explained in a November 2019 interview how the market has seen “numerous attempts to create-gold backed coins” as stablecoins increase in popularity.
The appeal behind gold-backed cryptocurrencies is simple. Gold has long been seen as a legitimate and trusted form of currency and store of value across nearly all civilizations. However, storing and securing physical gold bullion can be challenging.
Hopes are that cryptocurrencies backed by gold, like GoldCoin, can serve as a medium between the physical and digital world, allowing investors to buy and sell bullion easily.
Questions Remain About Stablecoins
The history of stablecoins is long and controversial. The company behind Tether and Bitfinex has faced several investigations for alleged misappropriation of funds. Tether’s fiat-backed cryptocurrency has faced immense scrutiny amid allegations the company did not have the required fiat reserves to back up the digital coin.
Some stablecoins only undergo financial reviews and not a thorough financial audit, raising questions in the minds of many prospective investors.
As gold-backed cryptocurrencies continue to rise in popularity, many ask if they are a worthwhile investment. There are several enticing advantages cryptocurrencies based on gold have over other options.
Understanding The Benefits Of Gold-Backed Cryptocurrencies
Advantage 1 – Gold Is A Relatively Lucrative Investment:
One of the biggest benefits of gold-backed cryptocurrency is its relationship with the spot price of the precious metal. It is impossible for cryptocurrency backed by gold to dip below the spot price of physical gold, but there is also a chance a popular coin could actually trade above the spot price for gold at certain periods of time.
On balance, physical gold tends to perform better when the stock market is in rough waters.
While this is not a tried and true pattern, CFP Stanley Francis reminds investors: “There will definitely be time periods that show gold is the best investment on the face of the planet.” Physical gold is also still held as a reserve asset by the majority of the globe’s governments, central banks, and pertinent institutions.
The spot price of gold gives a gold-backed crypto a floor price that should remain relatively high while opening up the potential for limitless growth if a particular coin becomes popular.
Advantage 2: Ease Of Transaction & Liquidity:
Managing and storing physical gold can be difficult. Gold bullion is heavy, hard to manage, and can pose a significant security risk if an investor has large amounts of the metal. Shipping off bullion to be stored in a vault can pose risks as the holder does not have immediate access to their investment.
Things are different with gold-backed crypto. Some gold-backed cryptocurrency projects endeavor to democratize gold investment by offering fractionalized shares.
This means investors can purchase fractions of an ounce of gold, which promotes buying and selling of the particular gold-backed crypto. Users can trade digital coins and then request redemption of their virtual currency for physical bullion.
Legitimate gold-backed crypto projects will conduct and publish the results of regular audits and provide ways, like a live stream of vaults, to assure holders there is enough physical bullion to back up the amount of digital cryptocurrency in circulation.
Advantage 3: Leveraging Blockchain:
Legitimate gold-backed cryptocurrency projects are often built on well-known blockchain networks like Ethereum. This architecture opens up a range of possibilities, including wallet storage, exchange support, and various transfer options.
It also helps facilitate the future growth of the cryptocurrency industry.
Utilizing blockchain also can help streamline or even mitigate fees related to managing the token and storing physical gold reserves.
Some projects simply choose to cover various fees themselves. In contrast, trying to determine exchange rates, fees, and other transactional information pertaining to the buying and selling of physical gold can get very confusing.
The blockchain helps streamline transactions and provides an immutable record of the exchange of money or tokens that can be referenced at any time for free.
Investing In Gold-Backed Cryptocurrency
There are a number of advantages to investing in gold-backed cryptocurrencies. ‘Digital gold’ is easier to store, transact with, and manage than its physical counterpart. The option to buy and sell fractional shares of gold lets investors hedge against instability, no matter the size of their portfolio.