Gold is a precious metal utilized in lots of industries, however it’s likewise a well-known financial investment product and a historic hedge against financial chaos and inflation. Widely considered a risk-off property, gold prices tend to perform finest in a challenging monetary environment – – throughout a crisis, wars, shakedowns, and whatnot.
What is a Gold-Pegged Cryptocurrency?
Gold-pegged cryptocurrencies, on the other hand, are a derivative asset class that enables users to purchase, trade, and get direct exposure to gold without needing to worry about physical storage and custody. They eliminate hassles associated with carry, transferability, along with associated illiquidity.
In the traditional world, they represent gold ETFs and CFDs, which track the price of gold without needing to physically own it.
There are numerous cryptocurrencies that are pegged to gold in one method or another, and they are backed in various ratios, depending on the project itself.
In this short article, we will have a look at some of the more popular gold-pegged cryptocurrencies.
Advantages and disadvantages of Investing in Gold-Backed Cryptocurrency
As with every other field, purchasing gold-backed tokens brings some benefits and disadvantages. Let’s have a closer look at both.
Benefits of Gold-Pegged Tokens
First things first, most gold-backed tokens exist as tokens built on the ERC-20 token requirement and, as such, are easily transferable and tradeable on numerous central and decentralized exchanges.
They get rid of the illiquidity of physical gold by allowing users to trade them at any time, so long as they have access to an exchange. Another advantage is that they can be split and fractionalized, enabling investors to own smaller sized parts and not always need them to invest a large amount of cash.
Gold-pegged tokens also carry some other advantages, commonly related to cryptocurrencies – – they are easily stored and transferable – – unlike physical gold.
Gold-pegged cryptocurrencies can potentially be bought by means of decentralized exchanges. Thus, their holders can purchase them without any measures of KYC (compared to CFDs and ETFs).
Drawbacks of Gold-Pegged Tokens
The truth that they are a derivative item likewise brings some risks. One of them is that investors don’t necessarily have direct ownership over the gold that their tokens are pegged to, although this may differ in particular jobs which enable physical redemption.
Additionally, they are reliant on central provider which manage the storage of the physical gold that backs the tokens, and this is entirely out of the investors’ hands.
Due to the fact that most of them are ERC-20 Ethereum-based tokens, each purchase or transfer of the token may bring high gas fees.
Compared to standard gold agreements for distinction (CFDs), gold-pegged cryptocurrencies are a lot less liquid as the market for them is a lot smaller compared to the tradition one.
Another difference from CFDs is the fact that smart agreements are susceptible to exploits. The opportunities are extremely small in this case, nevertheless, any wise contract carries a non-zero opportunity of failure.
Top Gold-Pegged Cryptocurrencies
While there may be many cryptocurrencies that claim to be pegged to gold, based on our research study, only two are worth looking into. These are Paxos Gold (PAXG) and Tether Gold (XAUT). Both tokens are released by well-known business with a proven history in the field and boast rather enough trading volume. The remainder of the gold-pegged cryptocurrencies stop working to provide considerable liquidity, and their respective websites haven’t been updated for many years, which is a red flag.
Paxos Gold(PAXG )Token symbol: PAXG Market Cap(since March 2022): $550 million Leading exchanges listed on: Binance, Uniswap, FTX, KuCoin, Kraken At the time of this writing, in March 2022, PAXG is the biggest gold-pegged cryptocurrency by methods of total market cap
, which sits at around$ 550 million. It likewise boasts the greatest daily traded volume. According to the project’s main whitepaper, each PAXG token “represents one great troy ounce of physical gold from a specific serialized gold bar.” Interestingly enough, if somebody owns enough PAXG to represent an entire gold bar, they are able to redeem the tokens for the physical gold bar.
The benefit of this is that ownership can be divided into units of as much as 18 decimal points, allowing people to get exposure to small quantities of gold. The token exists through Ethereum’s ERC-20 token requirement, making it easily portable throughout the network.
It’s also worth noting that the Paxos Trust Company – – the provider of PAXG 0 is a regulated banks, in addition to a qualified custodian. It’s a state-chartered business that’s controlled by the NYDFS (New York State Department of Financial Services) and is needed to support the greatest requirements when it pertains to securing customer properties. Furthermore, the NYDFS likewise regulates PAXG itself.