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Gold-backed cryptocurrency: What is it?

Gold-backed cryptocurrencies and tokens are quickly gaining popularity nowadays, and for good reasons. In this article, we’ll talk about what these assets are and why you should invest in them. We’ll also talk about some red flags and caveats you should consider. Check them out.

What are gold-backed cryptocurrencies?

Gold-backed tokens or cryptocurrencies are a type of stablecoin — a digital coin whose price is pegged to a tangible asset — that’s backed by gold. Each token has a value that’s equivalent to certain grams or troy ounces of gold. The equivalent amount of gold should be present in the reservers of the issuing company or a trusted custodian as a physically collateralized asset.

The price of the token should be equal to the current gold rate. If the cryptocurrency generates higher demand, then the token’s price can exceed the value of gold. If it flops, then its value remains the same as the value of a gram of gold.

Benefits of Gold-Backed Cryptocurrencies

The advantages of investing in gold-backed cryptocurrencies have to do with gold’s safe-haven appeal and the digital currency’s growth potential. The following are the main benefits why people invest in gold-backed cryptocurrency:

Stability

Gold-backed cryptocurrencies are more stable than other cryptocurrencies, which tend to be volatile and vulnerable to wild swings. The gold market is considered a safe haven, meaning it’s largely immune to market fluctuations and crashes.

As everyone wants to have a piece of this safe-haven asset, any token pegged to the value of the precious metal retains its value as long as it’s linked to gold.

Easier to Predict

Since their underlying markets are stable, gold-backed cryptocurrencies’ movements and price fluctuations are easier to grasp. The trends are often clear, and you can make informed predictions and investment decisions based oon such trends.

Other cryptocurrencies, on the other hand, often move in opposing or arbitrary directions, making it difficult to predict their next moves — a challenge that not many investors are up to face.

Better Storage Capacity

If you invest in actual gold, you must have the storage capacity to store large volumes of the yellow metal. On the other hand, investing gold-backed cryptocurrency allows you to “digitize” gold and take advantage of its value for investing and spending. You won’t need to worry about its physical location all the time, plus you save yourself from paying storage fees.

No Banking Needed

Using gold-backed cryptocurrencies let you trade and transfer values without going to a bank. This is faster, more accessible, and safer. You can also avoid the exchange rate fluctuations that happen when you transfer money globally.

Gives Access to Blockchain

The blockchain is the technology underpinning cryptocurrencies. Numerous blockchain trading platforms have sprung up in recent years, and tokenized gold offers an easy way to access such trading platform.

By accessing blockchain trading platforms, you’ll enjoy much easier trading, tougher security, and greater transparency.

Downsides of Gold-Backed Cryptocurrencies

On the flip side, you must be aware of the following downsides:

Limited Yield

Lack of yield means fewer earning opportunities. This makes other assets like dividend-paying stocks, bonds, or rental properties more attractive.

Less Stable than Actual Gold

Unlike pure gold investments, gold-backed cryptocurrencies are still susceptible to volatility.

Requires Trust

Gold-backed token issuers require you to trust them. You must work to confirm that the token is indeed backed by tangible gold. You may have to look for independent third party audits to confirm this.

Some are Scams

As is common with many rising industries, scams and disreputable projects are not unheard of, so be careful when choosing your issuer.

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