When we consider crypto backed by gold, we need to explore both assets. Gold is often associated with jewelry, but what about being a fundamental resource for electronics? Apart from being irresistibly beautiful, gold has pretty valuable use cases, such as being a high-value material in electronics manufacturing due to its characteristics.
For those who don't know, the gold standard used to be our monetary system for a long time. Gold did back the US dollar, which prevented governments and banks from having complete power over the money supply. However, now we have an economy where banks can dictate the money supply in any way they want. During the COVID-19 pandemic, we've seen an excessive money printing scheme which we now get punished for in terms of inflation. Absurd price rallies that are challenging to control are causing a great disturbance in our society. Meanwhile, government debt never stops increasing, and many macroeconomists are concerned that we're living in a bubble and that the bubble will eventually burst.
Since we'll dive deeper into crypto in our "crypto backed by gold" article, read our other blog articles regarding the cryptocurrency that started it all, Bitcoin. Thus, check out our "What is Bitcoin?" and "Blockchain Explained" articles to become an expert in the field!
The Rise of Crypto
One of the things that really took off during the pandemic was cryptocurrencies. People did not only worry about their health but also their assets. As people started to explore crypto, many began to consider crypto as a hedge against inflation and a much better savings alternative than having money in a bank that offers almost no interest. Blockchain technology has many capabilities, but in terms of currency and the economy, investors argue that a decentralized currency would mean a more transparent economy. Further, the banks would longer have the same power they have today. Although cryptocurrencies show great potential, the market still shows signs of hesitancy. Whether or not it has any real value, people are not used to digital assets only. As such, many started to wonder if there is crypto backed by gold.
Crypto and its Value
The outbreak of NFTs and sales of digital art reaching unprecedented numbers raises the question, “what is the real value?”. When assets are intangible, it’s hard seeing any value, especially when anything physical doesn't back it. Another fundamental factor that challenges the perception of cryptocurrencies value is that blockchain is a new technology. The majority of cryptocurrencies are not backed by anything than the blockchain technology itself. This means that blockchain has to prove its value, not only in theory but in practice. Would gold’s long history that the blockchain technology lacks be a great complement in the adoption to happen faster? Many gold enthusiasts know the power of having something backed by a physical asset; it provides a factor of insurance. Continue reading this "crypto backed by gold" article as we will discuss this further down in the article.
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Considering Crypto Backed by Gold - Why Gold?
Gold might be the most famous precious metal we know. It’s associated with wealth and plays a huge role in human culture and will likely do so in the future. If we ignore the obvious facts that gold is a rare and beautiful precious metal, we’ll discover that it has far more valuable traits than anticipated. It’s the use cases and function in our industries where we’ll discover the real value of the precious metal.
One of the main use cases of gold is the manufacturing of electronics. Gold is one of the best conductors of electricity. The metal is also pretty ductile and makes it easy to work with. As such, it is a big challenge to find other alternatives. Compared to other metals, gold is one of the least reactive elements on our planet; it doesn’t tarnish or rust. That is not the only reason it makes an excellent metal for jewelry – huge companies use it in the manufacturing of electronics and space exploration.
In conclusion, gold is heavily integrated into our culture. It is scarce, attractive, has the longest track record, and is a fundamental resource for building our modern future. All of this makes gold a solid asset. Combining it with technology, such as blockchain, might be an excellent solution to help the adoption move faster. In addition, gold might be a solution to counter other negative sides that the crypto industry contains, and that is the extreme volatility in the crypto market. Now, with all of this said, let's explore crypto backed by gold.
Gold-Backed Crypto
Crypto enthusiasts argue that Bitcoin is the "digital gold". That is a bold statement as we consider the fact that Bitcoin has only existed for a little over a decade and, therefore, has a lot to prove. Gold is as old as the earth, passed the test of time, and we still use it today. We don't call it "God's money" for nothing. One argument against Bitcoin being digital gold is the drastic price fluctuations, which are not the traits of a hedge asset. Both assets are quite different, one of them being physical and one being digital. Bitcoin has proven to be an excellent investment choice because of its increase in value. But why not bring these two assets together into one entity? We'll look at some alternatives that can give you the best of both worlds in the following sections.
Pax Gold (PAXG)
A New York-based trust company, Paxos Standard, issued its US dollar-backed stable coin, USDP. In 2019 they issued "PAX Gold" (PAXG), which is also a stable coin. However, actual physical gold backs it. Further, one troy ounce of physical gold backs each PAXG token. This solves the practicality issue of physical gold, storage, and transportation. As a result, anyone can send gold wherever in the world instantly or store it in an Ethereum wallet. Now, while one troy ounce of physical gold is expensive, PAXG offers the opportunity to buy fractions of the token. The minimum divisible number that can be bought of PAXG is 0.01 (1% of PAXG token).
What about the security of PAXG? Founded in 2012, the Paxos trust company has a long track record and has raised over 90 million dollars in venture funding. Furthermore, every gold bar has a registration number to which the token is assigned, ensuring that PAXG is fully backed by allocated gold. Also, PAXG offers a specific "lookup tool" where users can find information about the gold bar that's issued to the token.
Digix (DGX)
Similar to PAXG, physical gold is backing Digix's issued cryptocurrency, DGX. Founded in 2014 and established in Singapore, Digix is a relatively new company. Essentially, it is the same as PAX Gold, but with minor differences. One unique thing about DGX is that they offer another factor of transparency with its audit document. This list shows all the gold bars with their corresponding serial number. In addition, they even have an asset explorer where customers can view all the details about the gold bar.
Nothing is really backed by gold if you can't access it. However, customers wanting to redeem their gold can do so through a process called "recasting". However, when redeeming the gold, one must consider the 1% fee. Buying the token is not difficult, and just like Pax Gold, there are two ways of acquiring tokens. The first one is directly from DGX on their website. The other way is through a secondary market where Digix falls behind. Now, to find out which one out of PAXG and DGX is better, let's explore that topic in the final section.
PAXG or DGX?
There are more alternatives on the market than PAXG and DGX, but these two are the most noteworthy. Both are pretty similar, but the minor differences can be a deciding factor for some. It all depends on the preferences of the buyer. PAXG and DGX are both based on the Ethereum network. PAXG is different because it's been around longer and is more established. In turn, their reputation is far greater. Furthermore, New York state fully regulates PAXG as a "trust company", which makes it a pretty reliable business. On the other hand, a pretty competent team is backing DGX while providing a full audit of the gold, which doesn't make DGX less trustworthy.
The downside of DGX is that they have limited second market access to their tokens. Only two exchanges hold a significant volume. Well-established companies such as PAXG might be a better alternative for users that are looking for businesses with a longer track record. For those that want to trade their smaller amounts of gold-backed tokens and the option to redeem the gold for low minimums, then perhaps DGX is a better choice.
Crypto Backed by Gold - Conclusion
Gold and cryptocurrencies are two relatively different assets. But, like it or not, they share pretty similar purposes. The ongoing debates of which asset class is better serves no purpose. Both assets want to avoid inflation, and why not embrace both rather than compare them as enemies would do? Combining the two assets into one product can help gold and crypto enthusiasts get familiar with each other and push the adoption of both assets. The crypto market is extremely volatile, and gold might be one good solution to alleviate it and help the adoption of cryptocurrency.
Physical or not physical, our environment and system have become more digitalized. Owning something physical will probably become more challenging. Just look at the media today; we pay subscriptions for everything – news, music, movies, etc., without really owning anything. Owning a house or an apartment is harder than ever today. Tangible assets will always be valuable, and as our world becomes more digital, they might even become a scarcity. What do you think?
We have much more waiting for you in our blog at Moralis Academy if you enjoyed this article. Be sure to check out our recent articles answering questions such as “what is crypto?“, “what is Bitcoin?“, and “how to invest in crypto?”. Furthermore, we also dive deeper into advanced crypto topics in our “DeFi Explained” and “Blockchain Explained” articles.
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