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What Is a Gold-Backed Cryptocurrency?

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Gold-Backed Cryptocurrency

A coin or token issued that represents a value of gold; for example, one physical gram of gold equals one coin.

What Is a Gold-Backed Cryptocurrency?

A gold-backed cryptocurrency is a derivative digital asset whose value is supposedly underwritten by the equivalent price in gold. Each gold-backed cryptocurrency defines a single one of its tokens arbitrarily as having an equivalent worth of certain grams or troy ounces of gold, meaning that this equivalent should be present in the reserves/vaults of the company or a trusted custodian as physical collateralized assets.

Some gold-backed tokens even allow for the redemption of the tokens back for gold. Unlike most cryptocurrencies that have speculative value, a gold-backed token’s value is tied to a tangible asset, which cushions it against severe price fluctuations. The majority of gold-backed cryptocurrencies exist as ERC-20 standard tokens, although there are exceptions such as Paxos’ PAX Gold.

Blockchain-based digital assets backed by gold and other real-world scarce commodities are becoming increasingly appealing for investors looking to hedge their portfolios against weakening fiat currencies or regulation-bound stablecoins.

The biggest advantage that digital versions of gold hold over their physical counterparts is that they can be divided into any small unit or amount and transferred to another party.

Gold-backed cryptocurrencies have, however, historically struggled with systemic issues, such as:

  • low liquidity (as they aren’t generally traded across many exchanges);
  • ascertaining the proof of reserves (determining whether the company has the claimed reserves and gold backing or not);
  • a dependence on central parties for collateral safekeeping and auditing, which practically defeats their purpose as “cryptocurrencies,” as one of the necessary properties of cryptocurrencies is decentralization.

At present, the five leading gold-backed cryptocurrencies are

  • Paxos Gold (PAXG);
  • Perth Mint Gold Token (PMGT);
  • Digix Global (DGX);
  • Tether Gold (XAUT);
  • Meld Gold by Algorand.
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