Global Interest in Gold-Backed Digital Assets is Expanding

Global Interest in Gold-Backed Digital Assets is Expanding

2022 was not the best year for crypto. Followed by the crashes of the major players in the field, the entire crypto industry was shattered. The crash of Terra (LUNA) and algorithmically-backed stablecoin TerraUSD (UST) showed that stablecoins are not as stable as their name might indicate.

The highly volatile market makes investors look for alternatives to escape increasing market instability and the looming threat of stagflation. This makes them turn towards one of the most stable investment assets, gold.

Gold has been a valued resource since prehistoric times. Digital currencies backed by physical gold are becoming increasingly popular for traders, as they provide stability and security.

What Are Gold-Backed Cryptocurrencies?

Being backed by gold means that the crypto asset is connected to a tangible asset to reduce the excessive fluctuations in price. As the price of gold remains steady over time, gold-backed tokens remain more stable than other digital currencies.

The current market price of gold determines the currency’s value, and it may be used for transactions in a similar way to any other cryptocurrency. Gold reserves hold the physical gold used to back a particular cryptocurrency. Custodians, often banks or third-party companies, handle these reserves. The specific backing ratio varies based on the coin.

Many crypto projects are now offering gold-based crypto assets. Among the most well-known is the gold-backed stablecoin Tether Gold (XAUT), as well as VNX Gold (VNXAU) tokens issued by Europe’s first regulated platform for investing in tokenized precious metals, and Pax Gold (PAXG).

A gold-backed cryptocurrency must be issued by a company that possesses and maintains actual gold in vaults. For example, VNX Gold (VNXAU) tokens are based on Ethereum and Q blockchains and represent the direct ownership of physical gold certified by the London Bullion Market Association (LBMA).

Each bar is stamped with its serial number and linked to the tokens. Each kind of metal is stored in the secured vault, where it can be picked up directly or requested as a delivery.

Where to Buy Gold-Backed Cryptocurrencies?

Like with any other cryptocurrency, for each gold-back token there is a list of exchanges for purchasing. The coins’ availability can be easily checked on the platform. Different platforms have different levels of security, reliability, and liquidity, meaning research before purchasing is necessary.

Most of the gold-backed cryptocurrencies can be purchased on major crypto exchanges like Coinbase, Binance, or Kraken. VNX Gold tokens were recently listed on the Asia-orientated crypto exchange LBank.

On the Flipside

  • Gold-backed tokens are still a relatively new concept in the crypto industry. As a result, barring the fully gold-backed tokens like, e.g VNX Gold, there is no assurance that these digital assets will hold their value, or that the companies that support them will be able to fulfill their obligations.
  • While crypto is all about decentralization, gold-backed tokens are a highly centralized concept, as the actual investment – gold – is entrusted into the hands of the vaults. 
  • Certain gold-backed cryptocurrencies have liquidity issues. A small investor base causes a lack of trading on crypto exchanges, making it difficult to purchase or sell these tokens when desired.

Why You Should Care

Gold-backed cryptocurrencies can provide more stability and secure investments in a highly volatile crypto market. Gold’s price has seen less fluctuation than the stock market and crypto assets, stabilizing digital currencies’ prices. During the ongoing crypto winter, cryptocurrencies backed by tangible assets could be a solution for investors to protect their funds.

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