The Rise, Fall, and Resurgence of Gold-backed Cryptocurrencies

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    Gold-backed cryptocurrency is an interesting concept, and so we look at how much weight these cryptos hold in today's volatile cryptocurrency market. Will gold-backed cryptos come to reemerge with a vengeance or are they bound for disaster?

    Cryptos have received their fair share of backlash from the mainstream ever since Bitcoin popularized them. The significant shortcomings pointed out have always revolved around high volatilities and a lack of solid backing. And sceptics have long questioned the credibility of peer-to-peer transfers because no one can see the actual money.

    Now, offering a solution is the concept of asset-backed stable coins, gold being the most raved about intrinsic asset used. Although the feeling remains somehow mixed, there seems to be a general consensus among experts that tying digital currencies to the value of physical assets is crucial for their success.

    The subjects of gold-backed cryptocurrencies, as well as an investment in gold versus cryptocurrency investment, are still on the table and heatedly debated. Peter Schiff, a well-known stockbroker and a big deal in the financial industry, has denounced the Bitcoin versus gold argument, but not with too much success. As he represents the financial market as an authority figure, he managed to stir up quite a lot of attention from one his Tweets that clearly puts gold on a pedal stool while it looks like he gives Bitcoin a vote of zero confidence - let' s just say that didn't go down to well with some.

    Not a New Concept

    The idea of attaching the value of digital coins to real gold is not a recent one. The first well-known gold-backed digital currency was E-gold. It was launched in 1999 to try and beat the challenges facing the monetary system by withstanding the highs and lows that fiat currencies face.

    E-gold enjoyed significant popularity and was adopted by millions of users around the world. However, E-gold failed, and so did many other gold-backed digital currencies that came after it. For instance, Xaurum was a gold-backed cryptocurrency that launched in 2015 but didn’t get far.

    Now, with DLTs, Bitcoin, and altcoins more popular than ever, it seems that the need for backing them with physical assets is inevitable. Even government mints – like the UK mint – have released their gold-backed crypto coins, a clear indication that the world is ready.

    Just recently, rumours spread like wildfire that China, too, is planning on launching their gold-backed cryptocurrency. It is expected to be a trapdoor for devaluing the US dollar. Sources (including a former government official) said China had over 20,000 tons of gold, part of which it intends on using to stabilize their supposedly soon-to-come digital monetary system.

    Win-Win Solution: Security plus a Chance for Value Increase

    According to Lear Capital, the concept is relatively straightforward – an equivalent value of gold represents each coin. Then, investors can trade with cryptocurrencies, which is much more comfortable, convenient, and not limited by geographical location.

    Purchasers of the coin pay according to the current gold prices. If the coin’s popularity goes up, its rate could rise above that of gold, and the investor makes a profit. If not, however, the value would stick to its equivalent gold rate, which is an ingenious inbuilt stop-loss mechanism.

    Why Now?

    According to a previous report by Bitcoin.com, there are over 77 gold-backed cryptocurrency projects currently on the books. This figure comes as a surprise, especially when you consider that at least 30 similar currencies started full of promise but failed within the last ten years.

    But cryptocurrencies have never received such worldwide acceptance before. Also, blockchain-based infrastructure is becoming more and more vital to a whole new generation of financial models that facilitate value transfer but are in dire need of stable assets as collateral.

    The gold market, at 20 trillion dollars, stands as the ideal candidate for targeting with a digital asset technology. It has the potential to provide higher-quality credit, cost-efficiency, and transparency. Not forgetting, gold is already trusted as a store of value all over the world.

    Steve Ehrlich, CEO, and co-founder of Voyager pointed out that stable coins come with most of the benefits of Bitcoin and other currencies but lack their volatility because they are pegged 1:1 with stable assets. Therefore, one of the forces behind the gold-backed stable coins hype is the interest from both sides of the investment world. Many crypto investors are looking to include traditional assets in their portfolios, and a lot of gold bugs are in search of a more secure or cheaper way of investing in gold.

    The Competition is Stiff but Good for Consumers

    Every major voice in the industry is either working on a gold-backed cryptocurrency or has already launched one. The arms-race for the best stable coin is on. It seems a new coin backed by gold is hitting the IPO stage every few months, the most recent being Tether’s XAUT, which launched toward the end of January this year.

    As it goes in every industry, the ultimate winner of competitions is always the consumer. Rob Odell, vice president of product at Crypto Lending, believes that the adoption of these stable coins boils down to reputation. Only the companies that can offer the most reliable products will win the race.

    Andreas Ruf, CEO of Infini Gold, also pointed out that such kind of gold-backing was always going to revert to the custodian of the actual gold. “Trust in the issuer and custodian is key,” He said.

    Buyers Should Be Cautious

    We have already had a few cases where issuers of gold-backed coins turned out to be fraudsters. For instance, in October of last year, CoinDesk reported that Karatbars was under investigation by Florida regulators. The German company had been promoting a token tied to a Miami ‘crypto bank’ but didn’t have any banking license in the state. Moreover, CoinDesk could not verify the credibility of the company, which purportedly claimed to run a mine for producing gold.

    Therefore, the trusted platforms should be able to provide the most transparent, redeemable, compliant public tokens. The gold should be investment-grade, identifiable through serial numbers, and stored in secure vaults. They must also share their gold inventory with the public, which will allow for decentralized checks and balances.

    Ruf advises buyers to ask questions such as: what is the stability and track record of the issuer? And where is the real, physical gold stored? What’s more, buyers should find out the level of decentralization in a project. The last thing customers want is a centralized third party freezing their accounts or taking their tokens.

    Presently, the most widely accepted gold-backed stable coins seem to be digix gold (DGX), gold mint (MNTP), ekon gold(), xaurum (XAUR), darico (DEC), gold bits coin (GBC), zengold (ZGC), gold finix, goldenvein, anthem gold, asset base, aurum coin, aurus gold, and cyronium.

    Despite the long journey ahead and the many failures seen so far, one clear thing is that gold-backed stable coins are not going anywhere. And, we’ve only touched the tip of the iceberg.

     

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