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What Is A Cryptocurrency Backed By Gold?

November 22, 2023

As a more accessible option for purchasing actual gold, gold-backed tokens are growing in popularity. A form of digital currency that is backed by actual gold is known as a gold-backed cryptocurrency. The currency may be used for transactions just like any other kind of cryptocurrency and has a value dependent on the price of gold in the market at the time.

Some cryptocurrencies include gold as their backing in order to link the derivative asset (crypto) to a physical asset (gold) and limit price volatility. As a result, cryptocurrency backed by gold is frequently more stable than other digital currencies. This is due to the fact that the price of gold tends to be less erratic than the prices of other assets, such as equities or cryptocurrency.

Cryptocurrencies backed by gold can potentially be used as an inflation hedge. The value of the currency will grow if the price of gold rises. This may shield investors from financial loss if the value of other assets, like equities, were to decrease.

Like any other sort of cryptocurrency, gold-backed coins may be bought, traded, and used to make online purchases of goods and services. Investors in gold-backed cryptocurrencies benefit from higher profits due to changes in the price of gold and have the option to convert their tokens for gold.

How does a token backed by gold operate?

A specific cryptocurrency's physical gold backing is kept in gold reserves. Custodians, usually banks or other outside organizations, are in charge of holding these reserves. Depending on the coin, the particular backing ratio might change. A fraction of an ounce may be used to back some tokens, while others may be backed 1:1 (1 token to 1 gram of gold).

The biggest benefit of purchasing a gold-backed cryptocurrency is the stability and security it offers. Since it has been used as money for so long, gold's value has largely stayed constant. As a result, the value of a cryptocurrency with gold backing won't decrease below the price of gold, making it a reasonably secure investment. Additionally, the prices of various cryptocurrencies have been known to climb above the price of gold.

The majority of gold-backed tokens are Ethereum blockchain-based ERC-20 standard tokens. They are thus compatible with any wallet that accepts ERC-20 tokens. These tokens can also be sold on cryptocurrency exchanges, much like other popular cryptocurrencies.

Exist any stablecoins that are backed by gold?

Stablecoins that are backed by gold do exist. Given that stablecoins are digital assets backed by physical assets, gold-backed cryptocurrencies are technically a stablecoin "variant."

Government-issued fiat money, commodities, and gold are a few examples of real-world assets that support stablecoins. The reason stablecoins get that moniker is that their value is tied to another, more stable asset. So, for instance, the value of a stablecoin backed by the dollar would fluctuate in line with the value of the dollar.

The USD coin and Tether, which are both tied to the USD, are two of the most well-known stablecoins. Stablecoins backed by gold is chosen because

  • The stablecoin Tether gold (XAUT) is backed by gold and uses the same Tether token as USDT. Tether gold, which was introduced in 2020, is the most popular gold-backed stablecoin at the moment. One troy ounce of gold is denoted by the symbol XAUT on a London Good Delivery bar. The gold is kept in a Swiss vault under corporate management.
  • Tether Gold also provides access to conventional financial assets like exchange-traded funds in addition to gold (ETFs). On Tether's look-up website, which offers details on the gold bars these token holders possess, token holders may verify how much gold they now own.
  • The Tether gold token may be stored both on the TRON blockchain as a TRC-20 token and in an Ethereum-based wallet as an ERC-20 token. 50 XAUT, or 50 troy ounces of gold, is the required minimum purchase amount for Tether gold.

Who creates tokens backed by gold?

A corporation that possesses and keeps actual gold in vaults must issue or develop a cryptocurrency that is backed by gold. For instance, the well-known Ethereum token, DigixGlobal, is created by the Singapore-based corporation DigixGlobal (DGX).

By providing fractional tokens, DigixGlobal increases the accessibility of gold investment. As a result, investors may invest in exchange-traded funds, amass gold in tiny amounts, and manage their holdings in real-time. The Safe House Singapore vault in Singapore and another vault in Canada house the actual gold backing the DGX tokens.

With a minimum purchase requirement of $0.50 for gold-backed tokens, $50 to $600,000 for gold bars, and $150 for ETFs, one DGX is equal to one gram of gold. 100-gram Swiss gold bars from refineries like Metalor, Valcambi, and Produits Artistiques Metaux Precieux serve as the currency's collateral.

Paxos Gold (PAXG), a cryptocurrency provided by the New York-based Paxos Trust Company, is another illustration of a gold-backed cryptocurrency. One excellent troy ounce of London Good Delivery gold, kept at Brink's vaults in London, serves as the collateral for each PAXG.

Because it is an ERC-20 token, the one in question may be traded, saved, and transferred just like any other token based on Ethereum. For PAXG tokens, Paxos has no maximum purchase requirement and a minimum of $20.

If you are interested in more articles like this, here’s one about the currency used in England.

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