Gold-backed cryptocurrencies, a digital reserve proposition

Las cryptocurrencies They were born with the idea of ​​reinventing money and coupling it to a digital environment in a decentralized way. Without an entity intervening in its value, it would be determined solely by the impartial laws of supply and demand.

Time has passed since the birth of the first cryptocurrency for transaction and that technology has matured, allowing a large number of projects. One of them is backing digital money with ounces of oro real as the underlying asset.

The premise of these cryptocurrencies is simple: the price of each issued token must be equal to the amount of gold that backs it. Each unit must always represent that same amount of gold, so that it resembles having digital gold.

You can buy gold-backed digital assets, just like any other token, on exchanges like Bitfinex, Binance o Kraken. Among the best-known specimens, the cryptos stand out. Tether Gold, PaxGold y DigixGlobal.

There are subtle differences between cryptocurrencies backed by digital gold and one of the most important is that only some like Tether Gold and PaxGold are backed by real gold and others only have certificates on certain gold.

This means that the former safeguard an amount of gold that supports the capitalization of their projects in vaults. Most are located in European countries: the United Kingdom for Pax Gold and Switzerland for Tether Gold.

The fact that a company has the property of the backing for its cryptocurrency is today a characteristic desired by investors, who are looking for more security after other failed projects have affected them with the blocking of withdrawals.

What is its role in the ecosystem?

Gold has historically been used as an asset to preserve value. Due to its widespread acceptance throughout the world, it is used in times of uncertainty as a backup method that is usually defended even against inflation.

However, gold as an investment comes with some difficult problems to overcome. The first and most important is the high cost of storage; there is also low liquidity, in addition to limits by location, transportation and schedules.

Cryptocurrency technology allows tokenized gold to exceed these limits, as they can be easily stored in a wallet and most are created on the ERC-20 blockchain of Ethereum, which gives them great speed of operation.

“Those who own Tether Gold are looking for the intrinsic benefits of gold as a store of value along with other desirable characteristics that come from tokenization,” Tether CTO Paolo Ardoino said in an interview.

Another advantage is that tokenized gold can be fragmented, a feature that makes it possible to invest in gold for those who could not before and who had to resign themselves to only doing so in an indirect way: with an ETF that resembles the price of gold.

“It’s an asset for those who want to beat inflation and an easy ramp for those more comfortable with traditional assets, one that offers the benefits of gold, but without the fees and limited accessibility,” Ardoino added.

Billion Market

According to data from the CoinMarketCap platform, the market capitalization of gold-backed cryptocurrencies is just over a billion dollars. The total values ​​of Tehter Gold and PaxGold make up the majority of the amount.

The companies that lead these types of projects earn money through methods such as premiums on gold or tokenization. They can also earn income by charging fees for buying or selling the token on the blockchain network.

Being a cryptocurrency, gold-based tokens can be used to make purchases, although this is not their primary use. The companies that run the projects can acquire more gold to issue more tokens, which do not have a limit.

Asset-backed cryptocurrencies digitally represent ownership of the underlying, for which they can be redeemed. Assets in gold can be exchanged, but the drawback is that it is only possible to do so for bullion.

While there is no standardized size for gold bullion, the weight averages 400 ounces according to various sources. A troy ounce is bought for $1,700, so one bullion would cost just over $680,000.

It is worth mentioning that there are cryptocurrencies that include the words gold or gold in their names, but that have nothing to do with the metal. It is up to each investor to research the details of his investment.

jose.rivera@eleconomista.mx