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The Rise of Gold-Backed Cryptocurrencies

The Rise of Gold-Backed Cryptocurrencies

Explainers Essentials

07 Mar 2020

Investing in gold has become a lot easier than before.

With a new generation of cryptocurrencies appearing on the market, you don't have to worry about soliciting a broker to purchase the asset.

Meet gold-backed crypto tokens that allow investors to purchase digital assets pegged to the precious metal.

And now, it seems the the cryptocurrency space is going through its own "gold rush" era, with numerous projects being launched enabling investors in crypto to get easy exposure to gold.

In this article, we'll take a closer look at gold-backed cryptocurrencies to understand their purpose and see why they offer new ways for people to invest in digital assets.

Key takeaways:

  • The crypto industry is seeing increased interest in gold-backed digital assets
  • A gold-based cryptocurrency is a digital asset featuring a 1:1 value peg to gold.
  • Gold-backed tokens – such as XAUt, PAXG, DGX, and XAUR – provide the market a next-generation of crypto assets, featuring increased accessibility to gold investments along with a lower level of volatility, a stable value, and opportunities to integrate the asset with blockchain apps.
  • However, some fraudulent projects are offering illegitimate tokenized gold solutions which is why we recommend doing your own due diligence before investing in the asset.

What Is a Gold-Backed Cryptocurrency?

To begin, let's first see the definition of the digital asset type.

A gold-based cryptocurrency is a digital asset that is fully pegged to the value of gold.

The concept of gold-backed crypto is very similar to the familiar stablecoins – digital assets that are tied to the value of one or a basket of fiat currencies.

How Do Gold-Backed Cryptocurrencies Work?

By nature, gold-backed cryptocurrencies work similarly to digital assets.

You can purchase and sell them via crypto exchanges, hold them in your wallet, and you can usually sell them anytime you wish.

Like Bitcoin, gold-backed tokens are powered by blockchain technology, which – among other features – allows you to trade the digital assets 24 hours a day, 365 days a year.

However, the similarities between the Bitcoin and digitized gold end here.

Standard cryptocurrencies (e.g., BTC and ETH) are not tied to the value of other assets, while gold-backed tokens are 100% pegged to the precious metal's price, with one coin usually representing an ounce of gold (the market standard).

To preserve the 1:1 peg of the coins, the issuer is required to store (at least) the same amount of gold reserves with a trusted third-party as the number of tokens in circulation.

If you invest in gold-backed tokens, you'll see that your asset's price will move with the price of gold.

As a result, the price of gold-backed tokens won't necessarily fall when the crypto market takes a major hit and, also, its value won't necessarily increase with other cryptocurrencies during Bitcoin bull markets.

The reason is that gold is a safe-haven asset that is negatively correlated (or at least alternatively correlated) with the general market.

The History of Gold Tokens

The history of gold-pegged cryptocurrency tokens starts in 1996 when oncologist Douglas Jackson and attorney Barry Downey founded E-Gold in the US.

E-Gold offered its users a digital currency that was tied to gold's value. Furthermore, the service allowed customers to purchase gold anonymously without boundaries and the control of any government.

Jackson, the mastermind behind the project, believed in the idea of a currency that is not subject to the influence of governments and central bank policies.

The project was not meant to last.

Soon after expanding E-Gold's user base to over three million customers, the Secret Service had started to probe the digital gold service after an investigation revealed that cybercriminals were using the service for money-laundering.

While the management helped law enforcement authorities in combating suspicious financial activity, the project owners were penalized with Jackson sentenced to 36 months of supervised release.

The project was forced to comply with regulations which disallowed anonymous gold purchases. This eventually led to the downfall of E-Gold.

Despite the project's dramatic ending, E-Gold showed the world that there is a real demand for gold-backed digital currencies.

After E-Gold's downfall, multiple projects were launched to fill the gap left by E-Gold, but none of them managed to survive in the long term.

However, after cryptocurrencies had become popular – especially when Bitcoin's price had first met the value of one ounce of gold in March 2017 – the movement to a crypto gold rush began, with multiple projects presenting their own tokens backed by the precious metal.

What Are the Benefits of Tokenized Gold

  • Stable value: While cryptocurrencies are often criticized for their lack of intrinsic value, tokens backed by the precious metal rely on a different set of historically proven fundamentals.
  • Lower volatility: Digital assets tend to be highly volatile, with fast price movements and multiple cases of sudden value increases and decreases. On the other hand, gold features a relatively low level of volatility that is not subject to the inflation of fiat currencies.
  • Better accessibility: If you want to purchase gold, you have to go through the tedious process of creating an account at a brokerage. However, the tokenized version of the precious metal offers better accessibility to users who can trade the digital asset anytime they wish, with multiple options to buy, sell, and store the asset.
  • Integration with blockchain apps: As gold-pegged digital currencies utilize blockchain technology, it opens up new opportunities for token holders who can integrate their assets with blockchain apps and DeFi solutions to provide additional use-cases for the stablecoins (in case a viable infrastructure is built around the tokens).

What Are the Downsides of Gold-Backed Crypto Tokens?

  • The danger of illegitimate projects: Similarly to the ICO craze, fraudulent projects are taking advantage of the rising demand for gold-backed crypto solutions. These illegitimate projects pose a danger to investors as they are either scams – with the express goal to steal user funds – or are dishonest about their actual gold reserves (jeopardizing the peg).
  • Increased centralization: Most cryptocurrencies are decentralized by nature, which refers to the lack of a central authority in the network. However, as gold-pegged tokens require the services of a trusted third-party to store the precious metal reserves of the issuer, these projects usually involve a higher level of centralization than most crypto solutions.
  • Some tokens could be more volatile than gold: Even if the stablecoins are 100% pegged to the value of gold, they may feature a higher level of volatility than the precious metal. However, this varies by project, with some gold-backed crypto solutions showing more volatility than others.
  • Limited liquidity and availability for some tokens: Cryptocurrency exchanges tend to offer trading solutions for the most popular digital assets, which means that small projects may have a hard time getting their coins featured on these platforms. Therefore, tokenized gold projects that are not (yet) popular among crypto users may face issues of limited liquidity and availability.

Top Gold-Backed Crypto Projects

In this section, we've listed the most popular crypto projects that offer tokenized gold to users.

Important: The mention of these tokens does not imply an endorsement. We recommend investors to do their own due diligence before trading gold-backed digital assets.

Tether Gold (XAUt)

Tether Gold (XAUt) is the gold-backed cryptocurrency of Tether, the blockchain firm that has already issued a number of fiat-pegged stablecoins, such as USDT.

Tether Gold is the most popular tokenized gold asset, featuring total market capitalization of over $26 million.

One XAUt mirrors the value of one troy ounce of gold, with availability on Ethereum (in the form of an ERC-20 token) and TRON (as a TR20 token) blockchains.

After successful KYC and AML verification as well as holding the required minimum amount of XAUt, users can redeem their gold-backed tokens if they so wish.

By redeeming tokenized gold, Tether's customers can either choose to sell the gold for cash or get the bars delivered to locations in Switzerland.

However, as the minimum purchase is 50 XAUt (that costs about $75,000), buying directly from Tether may not suit investors who possess a limited funds.

On the other hand, XAUt can be fractionalized up to six decimals, allowing users to make smaller investments in the asset on cryptocurrency exchanges.

Pax Gold (PAXG)

Paxos – a financial institution and a direct competitor to Tether comes second among gold-backed tokens.

With a total market cap of $18.5 million, one PAXG is tied to the value of one troy ounce of a gold bar stored in US-based private security company Brink's vaults.

Available as an ERC-20 token on the Ethereum blockchain, PAXG investments require the purchase of a minimum of 0.01 troy ounce of gold (approximately $15).

According to the organization, users can redeem either full gold bullion bars at Paxos or choose to convert smaller amounts of tokens into physical gold via the services of supported retailers.

Similarly to Tether Gold, PAXG can also be traded on cryptocurrency exchanges.

Digix Gold (DGX)

Digix Gold (DGX) enjoys the third-largest market cap among gold-based digital assets.

Unlike XAUt and PAXG, the issuer uses a gram-based measure where one DGX coin equals one gram of gold.

An interesting aspect of the project is the increased transparency Digix provides to its users.

According to the Singapore-based organization, verification of the gold-backed tokens is available to anyone via the blockchain where the cryptocurrency is based.

While the gold-pegged crypto solution allows users to accumulate the digital version of the precious metal in micro amounts, investors can redeem their tokens for physical gold bars.

Digix displays relevant information – such as the progress and the dates of the audits as well as data about the custodian – for each gold bar.

Xaurum (XAUR)

Dubbed as "gold 2.0" by its issuer, Xaurum (XAUR) has a market capitalization of $3.15 million and features a unique model among tokens that are pegged to the safe-haven asset.

Like with other projects within the same digital asset category, Xaurum's gold base is increased every time a new token is issued.

However, every time a user transacts the cryptocurrency, the project burns 0.5 XAUR. While this decreases the total crypto supply, Xaurum's gold reserves remain untouched.

According to the project, this results in positive inflation, which could mean a larger growth potential for the cryptocurrency.

At the time of writing this article, 1,000 XAUR equals approximately 1.025 grams of gold.

AurusGOLD (AWG) & AurusCOIN (AWX)

Another interesting project which only recently launched is AWG. It is a token backed by o1 gram of 99.99% LBMA gold per token. It is issued on the Ethereum blockchain where its protocol interacts with a decentralized network of gold providers, vaults and distribution channels to bring AurusGOLD, to the mass market.

What’s interesting about this project is that is was launched alongside AWX, a revenue sharing token that derives 70% of the fees generated from the usage of AWG.

As people around the world trade AurusGOLD (AWG), 70% of all the generated transaction fees are proportionally distributed across all AWX holders (paid in AWG). The idea behind this is that as the usage of AWG increases, the value of AWX is expected to increase as well.

PhiGold (PGX)

Alongside gold-backed stablecoins, there are also projects that enable investors to engage this asset differently.

PhiGold, for example, effectively enables investors to purchase gold at a discount. Issued on the Ethereum blockchain, buyers of the PGX token are able to invest in gold before it is even extracted from the ground.

The token sale funds the mining operations and as the gold is extracted 50% of the revenue generated from the mine is placed in a separate Trust, in the form of London Bullion Market Association (LBMA) GLD 995 purity gold bullion, until the total circulating supply of PGX tokens is fully backed by 1/100th of an ounce of gold per token.

Initially the token hits the market at $10 per 1/100th of an ounce - gold is currently priced at approximately $16 per 1/100th of an an ounce, and it has not fallen below $10 in over a decade.

What's interesting here is not just that the token is initially sold at a discount, but also that it grants access to an area of investment in the gold industry that is usually the exclusive domain of investment banks, funds or similar traditional entities.

What to Look for Before Investing in a Gold-Based Token

There are a number of illegitimate gold-backed cryptocurrency projects on the market that take advantage of the growing interest in the asset type.

To avoid falling victim to fraudulent projects, you have to do your own due diligence before investing in any asset.

When you are evaluating tokenized gold projects, it's crucial to confirm that the digital assets are fully backed by real, physical gold.

You should also analyze the total number of tokens in circulation to verify that it matches the amount of gold reserves held by the crypto project.

You can find such information in the data the project has published on its website, whitepaper, and other relevant documents.

Finding recent news and community discussions related to the project could also help to determine the legitimacy of a gold-backed cryptocurrency.

Gold-Backed Crypto: a Next-Generation Safe Haven Asset

Tokenized gold adds stability to investor portfolios and is attractive as no brokers are required to act as an intermediate.

With low volatility and stable value, gold-pegged tokens provide a next generation of crypto assets, featuring increased accessibility to precious metal investments.

And, as soon as a decent infrastructure is built around this digital asset type, tokenized gold can be integrated with additional blockchain applications to provide more use-cases (e.g., used as collateral for crypto loans).

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