What is Gold-Backed Crypto?

Gold-backed cryptocurrencies present an attractive option for investors seeking stability. The price of gold-backed cryptocurrencies is closely correlated with global gold prices, a feature that holds significant appeal for investors due to gold’s well-established reputation as a safe-haven asset. Want to know more about gold-backed crypto and its crypto-list? Check out the full article below.

Article Summary

• 🥇 Gold-backed crypto is a digital asset whose value is secured by physical gold, providing investors with a stable asset that mirrors gold’s price movements without the necessity of owning physical gold.
• ⛓️ These assets operate on blockchain technology, typically as ERC-20 tokens. It makes transactions easier and can be fractionalized so investors can have small gold holdings.
• 🟢 The advantages of gold-backed crypto are price stability, hedging against inflation, and higher transactionality compared to physical gold.
• 🔴 While it offers many advantages, gold-backed crypto also has disadvantages, such as relatively low liquidity and issues regarding the transparency and security of the physical gold storage that serves as collateral.

What is Gold-Backed Crypto?

Gold-backed crypto is a digital derivative asset whose value is pegged to the price of physical gold. This means that the asset’s value will closely track the fluctuations in the price of physical gold in the market. By making gold as the underlying, every unit of gold-backed crypto in circulation must have the same amount of actual physical gold stored in a custodian.

The purpose of gold-backed crypto is to prevent excessive asset price fluctuations. Gold is nicknamed as a safe haven because it has the most stability compared to other asset classes. Thus, gold-backed crypto prices will be much more stable than other crypto assets.

In addition to stability, gold-backed crypto can provide investors with gold asset exposure. Moreover, with gold-backed crypto, investors do not need to consider storage like physical gold or management fees charged if they buy gold-based ETFs.

How Gold-Backed Crypto Works

Gold-backed crypto works by tokenizing ownership of physical gold, and then the transaction will be stored on a blockchain. Tokens on the blockchain represent ownership of physical gold managed by the issuer. Meanwhile, the physical gold used as the underlying will be stored by the custodian, a bank, or a third-party institution.

The ratio used between assets and physical gold can vary in gold-backed crypto assets. Some use a 1:1 ratio (1 token equals 1 troy ounce of gold) or smaller fractions. Generally, gold-backed crypto tokens are ERC-20 standard tokens. This means they can be traded, sent, and stored in wallets supporting ERC-20 tokens.

Technically, gold-backed crypto is another variant of stablecoins. This is because stablecoins are crypto assets whose value is pegged to a stable, real-world asset. Typically, stablecoins are pegged to fiat currencies, such as USDC (pegged to the US dollar) or IDRT (pegged to the rupiah).

You can learn more about stablecoins and how they work in the following article.

Investors must buy in predetermined units of physical gold, such as 1 gram or 1 troy ounce. While in gold-backed crypto, investors can buy it with a much smaller nominal. Investors can make these purchases through exchanges that sell gold-backed crypto assets.

Some gold-backed crypto issuers offer a redemption feature where investors can switch their tokens into physical gold. If the investor decides to redeem it, the issuer will burn and remove it from circulation according to the number of tokens exchanged.

List of Gold-Backed Crypto

According to data from CoinMarketCap, the total market cap of gold-backed crypto assets reaches US$ 959.8 million. In April 2023, as the gold price reached its highest level, its market cap exceeded $1 billion. The following are the most popular gold-backed cryptos:

1. PAX Gold

PAX Gold (PAXG) is a gold-backed crypto issued by Paxos Trust Company. It uses physical gold from the London Bullion Market Association (LBMA) in a 1:1 ratio. This means 1 PAXG equals one troy ounce (400g) of LBMA gold.

All gold underlying PAXG is stored in LBMA vaults. It is also audited monthly to ensure the number of PAXG tokens in circulation matches the amount of physical gold. While the gold of investors who purchase PAXG will be stored in Paxos’ custodian. Another feature PAX Gold offers is the redemption of PAXG tokens for LBMA physical gold.

As an ERC-20 token, investors can purchase PAXG through various exchanges. However, for direct purchases through Paxos.com, the minimum purchase is 0.01 PAXG. So far, PAX Gold does not charge for custodial services or gold storage. However, they charge 0.02% for transaction fees and standard gas fees.

PAX Gold has a market cap of US$ 476.52 million, the highest among other gold-backed cryptos. It has a circulating supply of 248,317 PAXG.

Find out the importance of understanding the difference between total supply, circulating supply, and fully diluted valuation here.

2. Tether Gold

Tether Gold (XAUt) is a gold-backed crypto issued and controlled by TG Commodities Limited – Tether’s sister company. Like PAX Gold, XAUt also uses a 1:1 ratio, meaning 1 XAUt equals 1 troy ounce of LBMA gold. All LBMA gold underlying XAUt is held in vaults in Switzerland.

XAUt is an ERC-20 token that allows it to be traded on exchanges. XAUt tokens are divisible to fractions of six decimals (0.000001 troy ounces). However, for direct purchases through Tether Gold, the minimum amount is 50 XAUt or 50 troy ounces.

Like PAX Gold, users can redeem their XAUt tokens into LBMA physical gold. However, in terms of transaction fees, Tether Gold exempts investors from transaction fees beyond gas fees for transaction delivery. They only charge a 25 basis point XAUt purchase or exchange fee.

The current market capitalization of XAUt is US$ 475.42 million, slightly adrift of PAX Gold. As for the supply in circulation, there are currently 246,524 XAUt.

Pros and Cons of Gold-Backed Crypto

Pros of Gold-Backed Crypto

• 🥇 Stable value. The main advantage of gold-backed crypto is that the asset is pegged to the price of gold. Thus, its price will remain stable following the price of gold even if most other crypto assets are experiencing a bear market.
• 🛡️ Hedging against inflation. Along with its stable value, gold-backed crypto can be used to hedge against inflation, just like real gold. It can be the most optimal asset choice when the crypto market is volatile.
• 💲 More transactional. Gold-backed crypto is digital, unlike physical gold, making it divisible into smaller pieces. This makes it easier to transact and more affordable.

Cons of Gold-Backed Crypto

• ⏳ Still untested. One of the cons of gold-backed crypto is that it is a new concept. This means that there is still no guarantee and assurance that their tokens can maintain their value in the long run. Not to mention the ability of the company behind it to always fulfill its obligations.
• ⚠️ Limited liquidity. Another drawback is the liquidity issue. It is not yet the first choice of investors or traders on exchanges. This makes it more difficult to buy or sell the asset at any time.
• 👓 Transparency. Accounting for the actual gold may not be as transparent and clear-cut as accounting for digital currencies, which blockchain technology inherently protects. Therefore, determining whether the physical gold exists and its storage is secure can be a matter of trust for certain investors.

You can find out information about the liquidity and transparency of a token through tokenomics. The following article will help you understand how to use tokenomics.

Conclusion

Gold-backed crypto is a digital asset backed by physical gold, designed to offer investors both price stability and exposure to gold assets. As a subtype of stablecoins, gold-backed crypto presents numerous advantages, including price stability, protection against inflation, and improved transactional efficiency when compared to physical gold.

However, there are also some drawbacks. These include limited testing, relatively low liquidity, and transparency concerns related to the storage of physical gold as collateral. As of April 2023, the market capitalization of these assets has surpassed the $1 billion threshold, featuring popular options like PAX Gold and Tether Gold. Despite its potential, the broader adoption of gold-backed crypto and the establishment of investor trust are challenges that lie ahead.

How to Buy Gold-Backed Crypto on Pintu

For those of you who are interested in buying gold-backed crypto, there is no need to worry. You can buy one of the tokens, PAXG, on Pintu. The following is how to buy gold-backed crypto PAXG on Pintu:

1. Create a Pintu account and follow the process of verifying your identity to start trading.
2. On the homepage, click the deposit button and top up the Pintu balance using your preferred payment method.
3. Go to the market page and look for PAXG.
4. Click buy and fill in the amount you want.
5. Now you have PAXG as an asset!

You can safely and conveniently purchase other cryptocurrencies such as BTC, ETH, SOL, and others safely and easily on Pintu. Pintu diligently evaluates all its crypto assets, highlighting the significance of being cautious.

Pintu is also compatible with popular wallets such as Metamask to facilitate your transactions. Download Pintu app on Play Store and App Store! Your security is guaranteed because Pintu is regulated and supervised by Bappebti and Kominfo.

Aside from buying and trading crypto assets, you can expand your knowledge about cryptocurrencies through various Pintu Academy articles. Updated weekly, all Pintu Academy articles are made for knowledge and educational purposes, not as financial advice.

Reference

• Krisztian Sandor, Tokenized Gold Surpasses $1B in Market Cap as Physical Asset Nears All-Time Price High, CoinDesk, diakses pada 19 September 2023.
• Marcel Deer, What is a gold-backed token and how does it work? Coin Telegraph, diakses pada 19 September 2023.
• Alexandria, Gold-Backed Cryptocurrency, CoinMarketCap, diakses pada 19 September 2023.
• XAUt Whitepaper, Tether Gold – A Digital Token Backed by Physical Gold, diakses pada 19 September 2023.
• Charles Cascarilla, Pax Gold Whitepaper, diakses pada 19 September 2023.