Cryptocurrencies were born from the idea of reinventing money and coupling it to the digital environment in a decentralized manner. If no entity intervenes in its value, its value will be given entirely by the impartial laws of supply and demand.
It's been a long time since the first transactional cryptocurrency was born, and the technology has matured and spawned a plethora of projects. One of these is digital currencies backed by real gold ounces.
The premise of these cryptocurrencies is simple: the price of each issued token must be equal to the amount of gold backing it. Each unit must always represent the same amount of gold, so it is similar to owning digital gold.
You can buy gold-backed digital assets on exchanges like Bitfinex, Binance or Kraken, just like any other token. The most famous examples are cryptocurrencies Tether Gold, PaxGold and DigixGlobal.
There are also subtle differences between cryptocurrencies backed by digital gold, one of the biggest differences being that only cryptocurrencies like Tether Gold and PaxGold are backed by real gold, while others only have certain gold certificates.
This means that the former keeps a certain amount of gold in the vault to support the capitalization of their projects. Most are located in European countries: Pax Gold in the UK, Tether Gold in Switzerland.
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What is its role in the ecosystem?
Gold has historically been used as a store of value. Due to its wide acceptance around the world, it is used as a backup method in times of uncertainty, often even as a hedge against inflation.
However, gold as an investment has some intractable problems. First and foremost, maintenance costs are high; besides location, traffic and time constraints, mobility is also low.
Cryptocurrency technology allows tokenized gold to overcome these limitations, as they can be easily stored in wallets, and most are created on the Ethereum ERC-20 blockchain, which makes them extremely fast.
“Those who own Tether Gold are looking for the intrinsic benefits of gold as a store of value, along with other desirable characteristics that come from tokenization,” Tether Chief Technology Officer Paul Arduino said in an interview.
Another advantage is that tokenized gold can be divisible, a feature that makes it possible for those who previously could not invest in gold and had to give up, only to invest in an indirect way: using an ETF similar to the price of gold.
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billion dollar market
According to data from the CoinMarketCap platform, the market cap of the gold-backed cryptocurrency is just over $1 billion. The combined value of Tehter Gold and PaxGold accounted for most of the amount.
Companies leading such projects make money through things like gold premiums or tokenization. They can also earn income by charging fees for buying and selling tokens on the blockchain network.
As a cryptocurrency, gold-based tokens can be used for purchases, although this is not their primary use. Companies running the project get more gold to issue more tokens, and there is no upper limit to the number of these tokens.
Asset-backed cryptocurrencies digitally represent ownership of an underlying object, which can be exchanged. It can be exchanged for gold assets, but the disadvantage is that it can only be exchanged for gold bars.
While there is no standard size for gold bars, according to various sources, the average weight is 400 ounces. A troy ounce sells for $1,700, so a gold bar would cost over $680,000.
It is worth mentioning that some cryptocurrencies include gold or gold (gold in English) in their names, but have nothing to do with the metal. Every investor should investigate the details of their investment.
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