Until recently, gold and cryptocurrencies were considered opposite ends of the investor spectrum. As a well-known ‘safe haven’ in investment senses, gold is backed by thousands of years of historical value recognized by every country and independent territory in the world. Meanwhile, considered a market disruptor, cryptocurrencies only recently gained mainstream momentum with Bitcoin hitting a $1 trillion market value in February.
However, as experts foresee the obvious predicament with inflation and the weakening of the US dollar, financial analysts are turning to gold investments and gold-backed cryptocurrencies, specifically, to diversify portfolios and hedges worldwide.
But in an ever-changing market, just what deciding factors should investors consider?
What is a Gold-Backed Cryptocurrency?
While gold is quite straightforward, gold-backed crypto is a bit more nuanced. Unlike “traditional” cryptocurrencies that have a speculative value, gold-backed cryptocurrencies are digital assets with values endorsed by its price equivalent in gold. Every token has an equivalent worth in grams or troy ounces of gold that must be physically available with a reputable custodian or in a company’s reserves — so, it’s not quite speculative like Bitcoin. But just like Bitcoin and other leading cryptocurrencies like Ethereum and Polkadot, gold-backed cryptocurrencies are still protected by blockchain technology.
Here are some of the popular gold-back cryptocurrencies today:
• Perth Mint Gold Token (PMGT)
PMGT are backed by gold blocks from none other than Western Australia’s Perth Mint, making it one of the top gold-backed cryptos on the market. Holders of this coin are issued digital gold certificates to validate their ownership, and the weight and purity of the gold in question. These certificates, which represent a token to certificate ratio of 1:1, can also be used to back up any requests for physical gold exchanges.
• DigixGold (DGX)
Created by Singaporean company DigixGlobal, DGX coins were created in an effort to improve gold’s accessibility. Each of the tokens is worth 1g of gold. The tokens can be used to virtually divide, redeem, and transfer actual gold bars. The gold that backs up DGX tokens are housed in vaults in Singapore and Canada.
• Tether Gold (XAUT)
XAUT is considered one of the leading gold-backed crypto tokens after recording a market capitalization of over $21 million in 2020. With gold reserves in Swiss vaults, each XAUT token is representative of one troy ounce of gold. XAUT tokens use the same blockchain ledger technology as Etherum, and its token holders are given serial numbers which they can then use to search for their gold bars on the Tether website. Tether can also deliver investors’ gold physically or have it redeemed for its cash equivalent.
What Are The Different Forms of Gold Investments?
- Physical Gold
Physical gold is one of the most common parts of investment portfolios. Given the precious metal’s popularity when it comes to jewelry, it has been easy to transfer and acquire this asset through generations. Gold coins, bars, block, and bullions are also investable forms of physical gold. Owners of this particular asset have direct claim with little devaluation.
• Gold ETFs
Unlike other exchange traded funds (ETFs) that correspond to a portfolio of securities, gold ETFs represent investments just in this single asset: gold. Similar to other ETFs though, gold ETFs are traded daily and see price moves as they are sold and bought accordingly. It is a physically backed ETF with leading examples such as SPDR Gold Trust (GLD) and iShares Gold Trust.
• Gold Mining Stocks
Investing in gold mining stocks is ideal for investors playing the long game. While the return in gold mining stocks can be fairly high, they are best suited to investors with a higher risk tolerance given their speculative nature. Gold mining companies like Kinross Gold and Wheaton Precious Metals were some of the best performers of 2020, and could be generating more returns for their investors in the years to come.
Pros and Cons of Gold-Backed Cryptocurrencies:
+ Easily accessible
Given its digital platform, gold-backed token transactions can be done remotely with few limitations. Accessible through online platforms, virtual currency is not subject to the same scrutiny and restrictions that are imposed on the trading, authentication, and movement of actual gold. Transporting your tokens globally, for instance, is as easy as carrying your smartphone.
+ Divisible and transferable
A direct solution to physical gold’s limitations, gold-backed crypto can be easily divided into smaller units since its transactions are handled digitally. Traders can therefore exchange their digital gold more flexibly.
– Lower liquidity
Since both stablecoins and altcoins do not have universally recognized regulations, not all entities choose to trade in these assets. For instance, Kshitij Purohit of CapitalVia Global Research has said that for Indian investors, the lack of clarity on crypto rules is discouraging.
– Dependent on central parties
One of the biggest selling points of cryptocurrencies is its decentralization. However, gold-backed cryptocurrency is still dependent on central parties for auditing and safekeeping. For example, the PMGT is backed by reserves stored in the Perth Mint of Western Australia. While this is a necessary security measure, the human limitations of such centralized institutions mean that holders have to wait for in-house audits.
Pros and Cons of Other Gold Investments:
+ Time-tested value
Given its millennia-long reputation as a stable asset, gold is recognized as a valuable investment worldwide. Unlike other assets such as real estate, gold does not deteriorate over time. Should you choose to sell your gold in 10 days or 10 years, its price will not hinge on age.
+ Minimum volatility
With one-fifth the volatility of bitcoin, physical gold is considered a safe haven asset for obvious reasons. With an advantage over both cryptocurrency and fiat currency for its longevity, gold’s stability has also garnered it the prestige of being the ultimate currency for central banks.
– Physical limitations
Actual gold would require significant storage logistics and complicated border transport permits, should you plan on transferring them. The delivery and storage prices you must shell out for these assets are continuous so long as they are under your ownership. Access to your gold is also dependent on the availability of the bank, broker, or representative holding them for you.
– Requires redundant authentications
Counterfeit gold or gold mixed with other lesser-valued precious metals are rampant. Thus, to verify the legitimacy of gold, multiple certifications and assessments must be done on a regular basis. These procedures can be costly, regardless of if you are the seller or the buyer. International trading may also be trickier, as some countries prefer certain certifications over others.
Which One is Better?
Ultimately, just how much risk and speculation you’re comfortable with in your investments will determine which asset you’re better off trading in. Gold-backed cryptocurrency, while hinging its value in gold, can be riskier than gold itself because of the general ecosystem that comes with crypto. Adoption is still far from worldwide, with many countries imposing bans on cryptocurrencies. Gold, though, is widely accepted. However, the precious metal does tend to decrease in value in stable economies. This can mean that the safe haven asset should be treated as that — an investment to fall back on when times are tough but not something to depend on when the economy is flourishing. Cryptocurrency, gold-backed or not, can be exciting and actually generate faster and greater profits for those with an appetite for risk.
At the end of the day, neither gold nor cryptocurrency are going anywhere. As we undergo continued digitalization, having investment diversifiers like gold and gold-backed cryptocurrency is a sure way to keep a robust portfolio.
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About the Author:
Gavin Wells is a full-time data analyst and freelance finance writer. He’s an avid cryptocurrency supporter and has been reporting on the rise of blockchain for the past decade.
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