Gold is a precious metal used in many industries, but it is also a well-known investment product and a historical hedge against economic turmoil and inflation. Widely considered a risky asset, the price of gold tends to perform best in a difficult financial environment – during a crisis, wars, upheavals, etc.
What is a gold pegged cryptocurrency?
Gold-backed cryptocurrencies, on the other hand, are a derivative asset class that allows users to buy, trade, and receive exposure to gold without having to worry about physical storage. and guard. They remove the inconveniences related to transport, transferability, as well as the associated illiquidity.
In the traditional world, they correspond to gold ETFs and CFDs, which follow the price of gold without having to physically own it.
There are many cryptocurrencies that are pegged to gold in some way, and they are backed at different ratios, depending on the project itself.
In this article, we will look at some of the most popular gold-pegged cryptocurrencies.
Advantages and disadvantages of investing in a gold-backed cryptocurrency
As in all other areas, investing in gold-backed tokens has its pros and cons. Let’s take a closer look at both.
Advantages of gold pegged tokens
First, most gold-backed tokens exist as tokens built on the ERC-20 token standard and as such are easily transferable and tradeable on multiple centralized and decentralized exchanges.
They remove the illiquidity of physical gold by allowing users to trade them at any time, as long as they have access to an exchange. Another benefit is that they can be split and split, allowing investors to hold smaller portions and not necessarily requiring them to invest a large amount of money.
Gold pegged tokens also have other advantages, widely associated with cryptocurrencies – they are easily stored and transferred – unlike physical gold.
Gold pegged cryptocurrencies can potentially be purchased through decentralized exchanges. Therefore, their holders can buy them without any KYC measures (compared to CFDs and ETFs).
Disadvantages of gold pegged tokens
The fact that it is a derivative product also carries certain risks. One is that investors do not necessarily have direct ownership of the gold their tokens are pegged to, although this may differ in some projects that allow for physical redemption.
Additionally, they depend on centralized service providers that manage the storage of the physical gold that backs the tokens, and that is completely out of the hands of investors.
Since most of them are ERC-20 Ethereum based tokens, each purchase or transfer of the token may incur high gas fees.
Compared to traditional contracts for difference (CFDs) on gold, cryptocurrencies indexed to gold are much less liquid because their market is much smaller than the existing one.
Another difference with CFDs is the fact that smart contracts are vulnerable to exploits. The chances are very minor in this case, however, any smart contract carries a non-zero chance of failure.
Main cryptocurrencies pegged to gold
While there may be a number of cryptocurrencies that claim to be tied to gold, based on our research, only two are worth looking into. These are Paxos Gold (PAXG) and Tether Gold (XAUT). Both tokens are issued by well-known companies with a proven track record in the field and show somewhat sufficient trading volume. The rest of the gold-pegged cryptocurrencies don’t provide substantial liquidity, and their respective websites haven’t been updated in years, which is a red flag.
Paxos Gold (PAXG)
Token Symbol: PAXG
Market cap (as of March 2022): $550 million
Top exchanges listed on: Binance, Uniswap, FTX, KuCoin, Kraken
As of this writing, March 2022, PAXG is the largest gold-pegged cryptocurrency by means of total market cap, which sits at around $550 million. It also boasts the highest daily trading volume.
According to the project’s official whitepaper, each PAXG token “represents a beautiful troy ounce of physical gold from a specific serialized gold bar.” Interestingly, if someone has enough PAXG to represent an entire gold bar, they can exchange the tokens for the physical gold bar.
The advantage of this is that the property can be divided into units of up to 18 decimal places, allowing people to be exposed to tiny amounts of gold. The token exists through Ethereum’s ERC-20 token standard, which makes it easily portable across the network.
It should also be noted that the Paxos Trust Company – the issuer of PAXG 0 is a regulated financial institution, as well as a qualified custodian. It is a state chartered company regulated by the NYDFS (New York State Department of Financial Services) and held to the highest standards in protecting client assets. Additionally, the NYDFS has also regulates PAXG itself.
Gold Attachment (XAUt)
Token symbol: XAUt
Market cap (as of March 2022): $210 million
Top exchanges listed on: FTX, Bitfinex, Uniswap
CryptoPotato reported in January 2021 that Tether – the company behind the most widely used stablecoin (USDT), has launched a new ticked digital asset XAUt. Essentially, the token, which is based on Tron’s ERC-20 and TRC-20 standard, also represents one troy ounce of fine gold on a London Good Delivery bar.
XAUt holders can obtain undivided gold ownership rights to the specified gold bars. Their attribution is identifiable thanks to a unique serial number, weight and purity.
Speak DocumentationXAUt holders are also permitted to check the details of the gold bars associated with their addresses at any time via the website.
To request redemption in the form of physical gold, users must have completed the verification process of TG Commodities Limited. It is the company that issues the tokens. Alternatively, the token is redeemable on some popular cryptocurrency exchanges such as FTX and Bitfinex.
Overall, there are many gold-pegged cryptocurrencies, but only the two above meet the liquidity and reputation criteria.
Investing in gold has long been considered a rather safe endeavor, and it is also a well-known hedge (protection) against inflation and tumultuous economic environments.
Of course, as with any other investment, there is also a risk of capital loss. With this in mind, none of the above should be taken as financial advice. The content is for educational and entertainment purposes only. Always do your own research and make sure you never invest more than you can afford to lose.
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