Gold-backed cryptocurrencies are digital coins that are backed by actual gold, similar to stablecoins. A digital currency that is tied to the current gold price has less volatility than other well-known cryptocurrencies.
What is a Cryptocurrency Backed by Gold?
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 based on the price of gold in the market at the time.
Some cryptocurrencies have 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 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 might 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 can be bought, sold, 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 Works?
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 can 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 a gold backing won’t decrease below the price of gold, making it a relatively secure investment. Additionally, the values 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.
Is There 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 name is because 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 (USDC) and Tether (USDT), which are both linked to the USD, are two of the most well-known stablecoins. 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. On Tether’s look-up website, which offers details on the gold bars these token holders own, token holders can check how much gold they now own.
The Tether gold token can 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.
What are Some Advantages of Purchasing Gold-Backed Tokens?
The main benefit of investing in gold-backed tokens is that, unlike physical gold, they can be broken into smaller pieces and are digitally accessible, making them more portable, transferrable, and generally more economical.
Another major advantage is that gold-backed tokens will keep their value even after a cryptocurrency crisis because their value is tied to the price of gold. They are thus a wise investment during times when the cryptocurrency market is erratic.
Last but not least, a few gold-backed tokens also provide further features and advantages, like access to conventional financial assets like ETFs. Crypto ETFs are traded daily and track the price of digital currencies, enabling investors to further diversify their portfolios.
Gold-Backed Cryptocurrency Vs Common Cryptocurrency
The most popular cryptocurrency, Bitcoin, is not backed by any actual assets. Not all investors have found this to be true. One of the most frequently used criticisms of Bitcoin is that it has an intangible worth and isn’t backed by anything with real, concrete value. On the other hand, cryptocurrencies that are backed by physical gold have a definite value because of this connection.
Some investors feel more at ease investing in a cryptocurrency backed by gold because of its tangible gold foundation. Since gold has a longer history than cryptocurrencies, some investors think that the price swings of a cryptocurrency with gold backing can be better understood than those of a cryptocurrency without gold backing.
Even while this may be the case, it’s crucial to remember that a cryptocurrency backed by gold eventually tracks the price of gold. A gold-backed cryptocurrency won’t either, as long as the price of gold doesn’t soar. It is therefore not a very promising strategy to invest in gold cryptocurrency with the hope of receiving rewards that are unique to cryptocurrencies.
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