Tokens backed by gold are becoming more and more popular as a more accessible alternative to buying physical gold. Gold-backed cryptocurrency tokens are a type of currency that is backed by gold reserves. Investors can use the token for transactions just like any other kind of cryptocurrency. The token’s value is based on the price of gold in the market.
Gold-backed tokens aim to connect the derivative asset (crypto) to a physical asset (gold). This is done to prevent volatile price movements for the token. Volatility is common in the cryptocurrency sector, and many firms have begun using physical assets to bring that metric down. Thus, gold-backed tokens are often more stable than other digital currencies.
Furthermore, these digital assets can also be used as a hedge against inflation. 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 stocks declined during a bearish marker. Investors in gold-backed tokens benefit from higher profits due to changes in the price of gold and they have the option to convert their tokens for gold. Some countries like Russia are moving to gold-backed assets to reduce their dependence on the U.S. Dollar.
How do gold-backed cryptocurrencies work?
Issuers of gold-backed tokens hold physical gold in their reserves. Custodians, usually banks or third-party organizations, are in charge of holding these reserves. However, depending on the coin, a particular backed ratio may 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).
Most of these assets are Ethereum blockchain-based, ERC-20 standard tokens. Therefore, they can be used with any wallet that supports ERC-20 tokens. Moreover, these tokens can also be traded on cryptocurrency exchanges much like other popular crypto tokens.
There are certain stablecoins based on the same concept as well. Tether Gold (XAUT) is one such gold-backed cryptocurrency from the makers of the popular stablecoin USDT. Additionally, Tether gold, which was introduced in 2020, is the most popular gold-backed stablecoin at the moment. The token is represented by one troy ounce of gold on a London Good Delivery bar. Its reserves are kept in a Swiss vault under corporate management.
Downsides of gold-backed tokens
The fact that gold-backed tokens are still a relatively new idea poses one of the biggest hazards. There is also no assurance that the businesses supporting these tokens will be able to fulfill their obligations or that the tokens will keep their worth.
Because gold-backed tokens are linked to the price of gold, there is also the possibility that their value will fall if commodity value declines. Hence, investors should assess and evaluate these factors before making a financial decision.