The first cryptocurrency was Bitcoin, which started in 2009. Many other cryptocurrencies followed. However, it is only in the past few years that they have become more mainstream.
But crypto has a well-earned reputation for being volatile. This volatility is what makes high profits possible for investors and speculators. For day-to-day usage, however, this is a problem.
People want to know that a certain amount of money will purchase the same amount of goods and services from week to week. Ten percent price changes over a couple of days is not uncommon for bitcoin. Sometimes, larger changes occur — and faster.
The desire to marry the benefits of digital currencies (fast processing, security, and privacy) with the stability of established fiat currencies has led to the rise of stablecoins.
What Are Gold-Backed Stablecoins?
Stablecoins are cryptocurrencies that are pegged to a reserve asset (or a package of assets). This helps prevent the value of the stablecoin from changing rapidly, tamping down on its volatility. Gold is a popular asset for this purpose.
The specifics of what you can do with gold-backed stablecoins vary. For example, some allow you to redeem the tokens for physical gold — just like gold certificates of centuries past. This makes gold-backed coins appealing since it facilitates the easy movement of gold across borders.
There are two things to keep in mind about gold-backed stablecoins. The first is that they are not a means with which to speculate in the crypto market. If that is your interest, then you should look at bitcoin, ethereum, litecoin, and so on.
The second consideration is that gold-back stablecoins are not necessarily that stable in value. Gold is a volatile asset. It isn’t as volatile as bitcoin and most other cryptocurrencies, but it can see big price movements.
At the same time, if your interest is to speculate in the gold market, gold-backed cryptocurrencies are a way of doing this.
Four Examples of Gold-Backed Stablecoins
- Perth Mint Gold Token (PMGT): The Perth Mint Gold Token is a digital currency that is 100% backed by gold. The tokens are 1:1 backed by a GoldPass digital certificate issued by the Perth Mint. (The Mint is also the custodian of the gold.) It is guaranteed by the Government of Western Australia. The tokens themselves are issued by InfiniGold.
PMGT is notable for its government guarantee. The issuers of any gold-backed stablecoin have various methods of proving to purchasers that they actually own the gold they claim. But with PMGT, you get the guarantees of a major governmental entity.
- Paxos Gold (PAXG): Issued by the Paxos Trust Company, these tokens are each backed by one troy ounce of a 400-ounce London Good Delivery gold bar. These gold bars are stored in vaults managed by Brinks. By owning one of these tokens, you are also owning the underlying gold.
- Tether Gold (XAUt): Tether Gold is similar to Paxos’ offering in that each full token is backed by one troy ounce of gold of a London Good Delivery bar (meaning you own the underlying gold as well). XAUt is easily accessible due to its availability as an ERC-20 token on the Ethereum blockchain and as a TRC20 token on the TRON blockchain. Furthermore, if you meet certain conditions, you can redeem your coins for physical gold.
- DigixGlobal (DGX): DigixGlobal’s goal is to make the world’s fine gold bars “divisible, transferable and redeemable.” One DGX is equal to one gram of gold, and the physical gold is stored in vaults located in Singapore and Canada. You can redeem your tokens for gold at any time.
Other Ways to Invest in Gold
Gold-backed cryptocurrencies are an interesting concept, but pegging a digital currency to what is usually considered a safe harbor investment hasn’t prevented a high number of failures. As such, you may choose to opt for safe options and expose your portfolio to gold in other ways.
Other ways to invest in gold include:
- Purchasing physical gold: You can purchase gold bullion either through the stock market (for example, see the Sprott Physical Gold Trust) or in coin or bar form from retailers specializing in selling precious metals. The price you’ll pay is typically the spot price of gold plus 7-9% per ounce (this is the premium). (Note: premiums have increased significantly since the spread of the coronavirus.)
When purchasing physical gold, you’ll need to take into account storage fees (assuming that you’re not storing them in a safe located at your home).
- Purchasing shares of gold mining companies: By purchasing gold mining company shares, you are gaining some exposure to gold. This also means, however, that you’re subject to the day-to-day business issues that could affect the price of the stock. These include economic conditions, political turmoil, and the actions of the company’s management team.
- Purchasing ETFs, Stocks, and Gold Mutual Funds: There are a variety of investment asset options that focus on getting you access to gold’s price movements without necessarily granting you ownership of the gold. The specifics of the assets vary, but what you can expect is to profit when the price of gold rises and lose when it falls.
This is one of the safest ways to expose yourself to gold, and in general, all of these assets are regulated, meaning that you have some protection against any possible loss in value.
Stablecoins offer the prospect of delivering the best of cryptocurrencies and fiat currencies. Gold-backed stablecoins deliver on this promise to a degree. They are a convenient method of exchange, even if they aren’t widely accepted. Their prices are more stable than pure cryptocurrencies like bitcoin. But they have not been as stable as established fiat currencies like the US dollar.
In addition to their use as a currency, they allow investors to speculate on the price of gold. As such, they are risky investments and should not be traded without a complete knowledge of the risks involved.