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PhiGold: How Blockchain Makes It Possible To Buy Gold At A Discount

PhiGold: How Blockchain Makes It Possible To Buy Gold At A Discount

News & Insights

24 Mar 2020

Economies are shaking in their core. The narrative that Bitcoin acts as a safe haven asset has been called into question. Even gold, a proven safe haven has suffered turbulence the likes of which have not been seen in over three decades.

But it can hardly come as a surprise that crypto and gold are not immune to global earthquakes. More importantly, all things need to be considered in the long-term. Bitcoin still has some time to go to show its true nature, but gold’s reputation stands.

For centuries, gold has been the object of fascination across civilizations, and in the face of inflation, it has more often than not shown to be a reliable store-of-value.

In the context of crypto, where day trading strategies or other trading strategies often involve stablecoins and portfolio strategies are maturing, it is no surprise then that gold-backed stablecoins are increasingly garnering interest.

Only recently, Tether announced it too is moving in this direction with the launch of its gold-pegged stablecoin, XAUT. But irrespective of the benefits XAUT could offer crypto investors, in a sea of 70+ such stablecoins, it is not necessarily unique.

Instead, what has caught our attention here at AAX is PhiGold (PGX); a token linked to an innovative mining venture. Beyond facilitating exposure to the real price of gold, PhiGold aims to enable investors to get involved early on before the gold is actually extracted from the ground. Similar to buying real estate, off-plan, PhiGold effectively presents investors with the opportunity to purchase gold at a discount.

Gold as a strategic asset

Whether as an investment, a reserve asset, a luxury good, or a technology component, gold benefits from continued demand from various sources.

It is highly liquid, scarce, non-corrosive, presents no credit risk, and unlike typical commodities, it is not consumed and is therefore available for continued use.

Historically, gold has acted as a steady store of value. Just looking at the past century, gold has outperformed all major fiat currencies.

And this macrotrend shows no sign of abating.

According to the World Gold Council, for nearly two decades, investment demand for gold has grown by 15% on average, per year.

In part, this can be attributed to the emergence of new ways to access the market (e.g. gold-backed ETFs), and the expansion of the middle class in Asia. But following the 2008 Financial Crisis, and now even more so in the context of the recent outbreak of COVID-19, a renewed focus on effective risk management also plays an important part in gold’s proliferation as an investment asset.

Gold on the blockchain

Already since 1995, with the creation of E-Gold, attempts have been made at generating a viable gold-pegged digital currency, but it’s only now, 11 years after the first blockchain protocol was rolled out, that we are seeing digital gold take off.

Gold-backed tokens belong to a family of stablecoins. Issued on the blockchain, stablecoins are cryptocurrencies pegged to the value of another asset (e.g. fiat currency). While there are various ways to set and maintain the peg, the point here is that stablecoins play a crucial role in the crypto ecosystem. They offer stability in an otherwise volatile market - even under current circumstances - and they make it easier for people to gain exposure to assets that may otherwise be less accessible to them.

Over the past few years, several prominent gold-backed stablecoins have made their way into the crypto market, including PAX Gold, Digix Gold, GoldMint and Ekon Gold, but also newcomers such as AurusGOLD and now Tether Gold.

This development is not only important to the ecosystem, it will also be interesting to see how these tokenized traditional assets perform against Bitcoin and what opportunities there are for both traders and innovators.

Gold versus Bitcoin

If we take a look at the chart below, we can see that Bitcoin has far exceeded gold in terms of price, whereas gold has offered more stability.

Price of BTC on the left, price of gold on the right.

As we can also tell from the chart, despite gold’s overall stability, both assets have increased in value against the US dollar over the past few years. Indeed, according to our calculations, Bitcoin and gold prices are moderately correlated.

What we can learn from this is that both Bitcoin and gold seem to be driven, at least in part, by the same economic forces, and that gold is perhaps preferable to fiat-pegged stablecoins in the long-term.

What’s more, while the annual volatility rate for gold, from 2017 onwards, stands at 10%, Bitcoin’s annual volatility rate stands at 95%, presenting a potentially lucrative trading opportunity for investors in gold with a higher risk appetite.

But what happens when you introduce a more pronounced yield curve into the price of gold, by offering it at a discount? More importantly, how can that be done?

PhiGold explained

PGX is not so much a competitor to gold-pegged stablecoins. Rather, it represents a completely different way to engage the same asset class.

PhiGold’s business model is pretty straightforward. Instead of relying on funding from an investment Bank, Fund or similar traditional source - PhiGold has issued PGX, an ERC-20 token, which is used to raise the capital needed to fund its mining operations at the PhiGold Barobo gold mine in The Philippines.

Each PGX token represents 1/100th of an ounce of gold and can be redeemed for actual gold, crypto or fiat currency after a certain period.

PGX is initially on offer for $10 per token, but after approximately two to three years, each token can be redeemed against the spot price of gold which currently stands at $15 (and has not fallen below $10 in over a decade). That’s effectively selling gold at a 33% discount.

Here’s how it works:

  • With the money raised from the token sale, PhiGold funds its mining operations at the PhiGold Barobo gold mine in The Philippines, which according to a recent JORC compliant report holds approximately 272,000 ounces of gold.
  • The gold extracted from the mine is sold to the Central Bank of The Philippines for cash, and 50% of the cash flow is then used to purchase London Bullion Market Association (LBMA) GLD 995 purity gold bullion held in an independent Trust in London.
  • Once the amount of gold held in the Trust fully backs each PGX token for the value of 1/100th of an ounce of gold, holders of PGX can redeem their tokens directly at the Trust.
  • In the meantime, occasional buybacks and coin burns can be executed to stimulate the market, so as to gradually push the value of PGX up to the price of gold, enabling holders of PGX to redeem their tokens early if they so wish.

While the crowdfunding model is nothing new to the crypto industry, this particular business model is significant in the way it is applied.

In addition to enabling investors to purchase gold at a discount, PhiGold provides a real-world example of how blockchain technology can be leveraged to disrupt a well-established industry. It provides an avenue for both institutional and retail investors to engage an area of investment, otherwise less accessible. Most notably, it paves a way for local communities to directly invest in a resource industry, from which they may otherwise have been excluded.

PhiGold on AAX

AAX is an institutional-grade platform where crypto meets global finance. We believe that the digital assets economy is the future, and expect increased crossovers between crypto and the institutional-space. For this purpose, we have created a high-performing exchange which is the first of its kind to be powered by LSEG Technology’s matching engine, the same technology that powers London Stock Exchange.

It is not often that we highlight a specific token, but we believe PhiGold is setting a new precedent in finance from which could spring up similar projects around other commodities, potentially giving rise to new markets.

For this reason, AAX is glad to announce that we will be listing PGX and that it will be available for trade from March 31, 2020. .

Open an account with AAX, ordownload the app, and experience the next generation crypto exchange.

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AAX Trends focuses on market trends and analyzes essential events and factors in the cryptocurrency space. From DeFi, NFTs to GameFi and the metaverse, AAX has the answer to everything in the digital assets industry.

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