What are Gold-Backed Cryptocurrencies?
Cryptocurrencies have dominated the financial news over the last couple of years. Terms such as “Bitcoin” and “Blockchain” have gained more notoriety the more certain cryptos have increased in price.
But the technology behind the revolutionary Blockchain that powers Bitcoin has been around a long time. News outlet Benzinga reveals that cryptography as a technique has been used since World War II to securely transfer data and information. It has only recently evolved and merged with computer science to make way for more secure communication and information.
For those who have yet to dive into the elusive world of encryption, cryptocurrency is a form of digital money that operates securely and often anonymously. This currency is the pulse of cryptography, which is the process of turning data into code. The code is virtually uncrackable and impermeable, making it ideal for secure purchases and transfers.
However, cryptocurrency has had its fair share of backlash. Its main critique is its lack of physical backing, as well as its reliance on peer-to-peer computer transfer. Because no one can actually see the money being dealt with, people have long questioned credibility of digital currencies.
In response, gold-backed cryptocurrencies were formed. This type of currency operates similarly to normal cryptocurrencies, except that it is backed by real, tangible gold. A significant barrier to cryptocurrency from a consumer’s standpoint is fluctuation and the constant possibility of financial shocks, which Stablecoins in general hope to address. These are cryptocurrencies that are attached to the values of units of account, mediums of exchange, or certain stores of value. And in the case of gold-backed cryptocurrencies, the value of this type of money is tied to that of gold. The resulting combination of this highly valuable metal and the technological capabilities of blockchain, make it the stable choice in such a volatile market. A currency that can provide more transparency and reliability is all the more useful.
How did gold-backed cryptocurrencies come about?
In 1999, E-Gold was introduced as the first gold-backed cryptocurrency. Founder Doug Jackson envisioned it would be the cure for the modern monetary system’s ills, able to withstand the market’s highs and lows. It was met with a warm welcome, especially for privacy-conscious netizens who used it to open anonymous accounts. It was also popular with overseas sellers who could finally perform cross-border transactions.
Unfortunately, Wired reports that the venture was plagued with setbacks. The growing traffic load, lagging transactions, and increased competition eventually outweighed the success that E-Gold was starting to see. It also wasn’t long before new threats like cyber scamming entered the market, which was a factor in the company’s ultimate demise.
Years later, cryptocurrency reared its head again — this time successfully — in the form of Bitcoin. As Bitcoin gained popularity, companies started entertaining the concept of gold-backed cryptocurrency once more. But even then, people were still reluctant about its lack of tangibility. It took Bitcoin’s unprecedented boom in 2017 for gold-backed cryptocurrency to land on stable ground. Both currencies’ selling points lie in their intrinsic value, which transcend any paper, contract, or promise.
According to economics expert and The Bitcoin Event producer Ellery Davies, the value of Bitcoin and most other cryptocurrencies floats with supply and demand like a true world currency. Because the supply growth is capped, it is far less likely to swing unpredictably. But while Bitcoin exceeds gold in some aspects, like portability and counterfeit resistance, gold has often been the example of intrinsic value. After all, the precious metal has been accepted as a reliable source of wealth from all the way back to ancient Egypt and Rome. This track record alone has elevated gold into a modern economic asset with trillions of dollars’ worth in circulation.
Recently, larger institutions have been shifting the digital currency tide, with the UK’s Royal Mint launching its own gold-backed cryptocurrency. In January 2018, the Royal Mint Bullion officially became the first company to let customers hold gold-backed Blockchain assets. RMG Commercial Lead Tom Coghill was quoted saying, “It’s real gold you’re holding when you’re holding our RMG.”
Soon thereafter, ABC reported that the Perth Mint also jumped on the gold bandwagon, seizing the opportunity to bring investors back to precious metals. The move followed the rising trend of alternative investments. Chief Executive Richard Hayes explains that a lot of it can be attributed to the times’ increasing uncertainty.
True enough, gold has always been one of the most sought-after investments in the metals market. Although gold as a standard has been outdated, its value has remained more or less the same. FXCM’s gold price chart details how the precious metal’s place as a secure store of value has long been established, and is the reason for the market’s success throughout the years. Its price is benchmarked by the London Bullion Market, and is consistently ranked as the world’s most valuable metal. That’s because gold never expires, and neither do the investments it holds — unlike copper, whose value can diminish over time.
Now, Stablecoins present themselves as being a price-stable solution in an otherwise volatile environment.
How exactly do they Work?
The basic concept behind gold-backed cryptocurrencies is that a token or coin can be issued, which represents a given value of gold. The gold is then secured by a trusted third party and can be traded with other token holders. Doing so makes sure that a minimum value of the token is kept. The gold’s value is based on the price of the day, so even if it hits the minimum, the token will still remain equal to the current gold price.
The price of the coin can also depend on the cryptocurrency’s popularity. So as it gains more traction, it could potentially increase the value of gold. The best part is that it only goes one way. If the cryptocurrency fails, it does not affect the value of real-life gold and its markets because the value does not depend on market fluctuations — like a safe haven asset for when local currencies crash and collapse. Financially speaking, that makes it the 21st century hedge and the ultimate insurance policy against black swan events.
However, like all investments, gold-backed cryptocurrency also comes with some risks, mainly concerning the physical storage of gold. Investors are urged to carefully assess the third-party backing their prospective crypto-investment, as well as the security measures in place.