Another name for a digital asset underwritten by the equivalent price in gold is a gold-backed cryptocurrency. Each of these cryptocurrencies has an arbitrary backing to an equivalent worth of grams or troy ounces of gold.
Therefore, the equivalent amount of the underlying asset should exist in the secure reserve/vaults of the issuing organization.
At any time, users will theoretically have the ability to redeem their tokens. Most cryptocurrencies today have speculative value.
In comparison, gold-backed cryptocurrency has value tied to a tangible asset, which helps limit the price fluctuations assets are subject to.
To compare, bitcoin is not a gold-backed cryptocurrency despite its comparisons to being “digital gold.” The concept of bitcoin is fairly different, with its design keeping it completely separate from any physical assets or commodities.
However, bitcoin was the first well-known cryptocurrency, which helped spark interest in a new branch of stablecoins, including those backed by gold.
These stablecoins have quickly gained popularity, entering the market at just the right time. Investors have recently been searching for safe havens after facing massive volatility in both traditional and cryptocurrency markets.
Part of this volatility stemmed from the government-issued stimuli put in place at the start of the pandemic, which citizens are now circulating throughout the economy.
Are Gold-Backed Cryptocurrencies New?
The answer is far from it. Linking currency to precious metals began back in 1861 in the United Kingdom. The country introduced the concept of a fixed-rate, gold-backed currency to stabilize an economy that was quickly going global.
Shortly after, in 1879, the United States followed with an American version of gold-backed currencies. Gold had always been a resource that the government and central bank held as a way of proving their surplus.
Now, this relationship was just more apparent. Unfortunately, the government quickly realized the difficulty of aggregating resources and later switched to the trust-based economy that we see instituted today.
The idea of digital gold currencies originated around the same time as the internet. In 1995, E-Gold emerged as the first digital currency with a gold backing.
E-Gold quickly gained popularity as millions of people began using it. The success was short-lived, and the organization later shut it down. Other organizations attempted to duplicate these efforts, but none prevailed until today.
The Advantages of A Currency Backed by Gold
In part, the concept of gold-backed currency keeps circulating its way back due to all the benefits it provides.
First and foremost, a gold-backed cryptocurrency with the backing of precious metals is significantly more stable than any of its volatile counterparts.
Its stability comes from the intrinsic value of the price of gold, which maintains a reputation for being one of the most stable markets in the world. Throughout history, people have wanted to own gold, so the cryptocurrency representing them is likely to be in demand as well.
Secondly, compared to owning actual gold bars or bullion, gold-backed cryptocurrencies are easier to store. Not many of us have a secure vault sitting around, so storing physical assets can be costly and difficult to come by.
Digital gold is stored on the blockchain, meaning users can gain all the benefits of owning the physical asset without worrying about finding a physical location for it.
Finally, being based on the blockchain removes stablecoins from the authorities of banks. Therefore, investors can transfer value without going through a middleman. Therefore, transactions are quicker and more accessible.
Making the Investment
Gold has gained the majority of its popularity for being a long-term, stable investment throughout times of economic failure and market crashes.
Many investors diversify their wealth to include gold for its benefits as an anti-inflationary and tangible asset.
However, before deciding to invest, traders must understand what owning this asset class entails. It is important to have a basic knowledge of how digital currencies work in general and what a gold backing means.
Therefore, some research about the company and its reserves will also be valuable in determining if the issuing organization is reputable and is keeping the right ratio of assets in its reserves.