For a few years now, the relationship between cryptocurrencies and goldMetal-backed cryptocurrencies are much more reliable as they do not depend on the subjective value that pure cryptocurrencies have obtained through technology blockchainFurthermore, gold and other precious metals have always enjoyed a high and stable value.
In this context, cryptocurrencies backed by precious metals have emerged as an alternative for investors who want the best of both worlds. On the one hand, the flexibility of blockchain technology and on the other, the security and support provided by gold and other metals of historical value.
A stable alternative in a volatile market
Precious metal backing has been a strategy used for centuries in the financial system. For decades, The US dollar and other national currencies were pegged to gold reserves, which guaranteed its intrinsic value. With the advent of cryptocurrencies, some projects have adopted a similar model by linking each digital token to a specific amount of gold stored in certified vaults.
The objective of these digital currencies is offer a more stable option compared to other crypto assets which can experience abrupt price fluctuations in a matter of hours. While the value of Bitcoin and Ethereum is determined by supply and demand in cryptocurrency markets, gold-backed cryptocurrencies are directly linked to the price of the metal on international markets.
How are gold-backed cryptocurrencies issued?
The first step is gather a quantity of this metal in quantities sufficient to support the digital currencyThis gold is stored in certified vaults and the space where the gold is stored is regularly audited to ensure that a sufficient amount of this physical asset still exists.
The next step is the creation of cryptocurrency, which is issued in an amount proportional to the gold stored. The value of these coins is determined by a ratio between the weight of the metal and the cryptocurrency unit. For example, the following ratio is common: 1 cryptocurrency = 1 ounce of gold. Also, the gram as a unit of measurement.
These currencies are created using blockchain technology: their issuance is controlled, the whereabouts of each digital coin is known, and the currency is managed. However, gold certification and auditing are also required. Digital currencies have no value of their own, they always depend on an audited gold reserve.
Differences between traditional and gold-backed cryptocurrencies
Both use blockchain technology, but traditional cryptocurrencies derive their value from supply and demand in the market. value is completely intangible and somewhat subjective. In addition to the drawback of their volatility, they also arouse distrust and that is why they are not always accepted in all markets.
In contrast, gold-backed digital currencies They derive their value from an existing gold reserve, accounted for, and under control. If this gold reserve increases, then the value of the cryptocurrency increases.
They are much more stable currencies that provide greater confidence in the medium and long termThey are widely used among large companies, in international transactions, and by companies looking to invest. They are not yet as popular for everyday expenses, so their use is less common than that of traditional cryptocurrencies.
Another difference is that the blockchain mechanism serves to control the quantity of gold-backed currencies, to ensure the transparency of transactions, and to certify their issuance. However, blockchain is complemented by auditing companies of the gold reserves that monitor the price relationship between coins and quantities of precious metal.
Some gold-based cryptocurrencies
Currently, there are several virtual currencies already held in reserves. They are used for Long-term investments, portfolio diversification, remittance payments, and international shipments, making it a common payment method for mining and e-commerce companies. Some of the most well-known gold-backed cryptocurrencies are:
- the goldco: Created in 2013, it is one of the safest. Its price is robust and stable thanks to its well-audited gold reserves.
- OneGram: Each coin is backed by one gram of gold, making it quite affordable for the general user.
- Xaurum: One of the most sought-after, as its value is very close to that of Bitcoin. It can literally be exchanged for gold, as it is an accepted payment method in gold markets.
- PaxGold: Launched in September 2019, it was created to make gold easier to trade. It uses the Ethereum blockchain, and each coin is equivalent to one ounce of gold.
- Tether gold: Its value is calculated in one ounce of gold, audited in a physical gold bar. This currency is very stable and usually corresponds exactly to the price of gold.
- Comtech GoldEach token in this currency is worth the value of one gram of pure gold. It's quite reliable, with an affordable price per coin.
Advantages and challenges of this financial model
Metal-backed cryptocurrencies offer clear advantages for investors. The main one is the stability that gold provides as a safe haven asset. In times of economic uncertainty, precious metals have historically been a safe haven, and the digitalization of these assets allows for quick and easy access from anywhere in the world.
Furthermore, by operating on blockchain networks, these assets combine the security of cryptocurrencies with the guarantee of a tangible reserve. However, This model also faces significant challenges. One of them is the need for clear regulations that guarantee the authenticity of the metal backing. Investor confidence depends on the transparency of issuing companies and the constant verification of reserves.
Another challenge is liquidity. Although these assets can be traded on some cryptocurrency exchanges, Its adoption is lower compared to Bitcoin or Ethereum. Despite its stability, its lower transaction volume can make it difficult to use as an everyday payment method.
Regulation and adoption in global markets
In some countries, authorities have begun to evaluate the viability of this model and its impact on the digital economy. In the United States, for example, the Securities and Exchange Commission (SEC) has closely monitored projects like Paxos Gold to ensure they comply with regulations that protect investors. In Europe, some financial institutions have explored the possibility of integrating these types of assets into their platforms., although there are still regulatory hurdles that need to be resolved.
Meanwhile, in emerging markets, these cryptocurrencies have begun to gain popularity as an alternative to protecting assets against inflation. In countries with volatile currencies, access to gold-backed digital assets represents an attractive option for safeguarding the value of money without having to resort to traditional banks.
