In many ways, gold and cryptocurrency have a lot in common. First of all, they are both used as safe havens from the financial markets, usually gaining more interest when the stock market is turbulent or during times of economic recession.
Secondly, gold and (most) cryptocurrencies are not inflationary. We can’t just create more gold out of thin air, and the same can be said for Bitcoin. Yes, Bitcoin can be mined to increase the available supply, but once the max supply of 21,000,000 has been hashed, no more will ever be created.
This is in sharp contrast to fiat currencies, which are subject to quantitative easing and inflation. Because central banks can control how much money is printed with fiat money, they have more control over the economy.
Furthermore, because Fiat money is not backed by a commodity, it is more susceptible to inflation because its value is not intrinsic. Despite the long periods of relative stability brought about by Fiat currencies, many people view them as fundamentally flawed, which is one of the main drivers behind the success of Bitcoin and Gold.
Gold Backed Cryptocurrency Explained
Fortunately, for those of you that love both gold and crypto, there are a few products out there that bring these two worlds together. Enter the gold-backed cryptocurrency.
A gold-backed cryptocurrency is a digital derivative asset where each token is backed with physical gold. It is a type of stable coin, but instead of being backed by the dollar like Tether, or True USD, these assets have their price pegged to the current gold price. This means they are far less volatile than the rest of the crypto market, and they offer a safe place to hold your funds during market crashes and periods of high volatility.
However, for a cryptocurrency to be officially considered “gold-backed,” the equivalent amount of each circulating token must be present in the reserves/vaults of the company that offers the assets. As a result, gold-backed tokens have an inherent value that is tied to a tangible asset, unlike Bitcoin and the vast majority of altcoins.
What are the problems with Gold-Backed Cryptocurrency?
- They tend to have low liquidity when compared to some of the more popular stable coins, such as Tether and USD Coin. This makes it difficult to trade large quantities due to high spreads.
- Some companies do not provide sufficient proof of reserves. In other words, they may be offering gold-backed cryptocurrency without the equivalent gold to physically back it up.
- Gold-back crypto is not decentralized, which goes against many of the core principles of the entire space.
- We aren’t sure of the exact number of gold left to mine in the world. To make matters worse, we don’t really know the numbers on sold assets held by governments as they aren’t audited. This makes it hard to estimate the total supply.