What Are the Prospects of a Gold-backed Cryptocurrency?

A gold-backed cryptocurrency will only be successful if it can build trust with users, who will need to believe they can store value safely.

To build this level of trust, operators need to be transparent with their underlying gold holdings and conclusively prove these holdings are relative to the coins they’ve issued.

At the time of writing this trust is lacking because gold-backed cryptocurrencies suffer the same as other “pegged” cryptocurrencies, the most popular of which is Tether (USDT).

Backed by the US dollar and suffering its own credibility issues – specifically an unclear audit trail of the supposed underlying US Dollars - this hasn’t stopped its US Dollar value quickly rising to $2.2 billion.

The prospect of high adoption rates by users will be affected by the performance of ‘fiat’ currencies. Gold-backed cryptocurrency operators claim that fiat currencies are flawed and an alternative is necessary. The US Dollar was tied to gold until the early 1970s and since then US Dollar inflation has been less volatile.

The US government’s ability to control supply and demand of currency was cited by economists as a key factor in managing the 2008-09 financial crisis. Since the introduction of fiat currency in the US the Dollar has been a more stable asset class.

Fiat Versus Cryptocurrency

Cryptocurrency has many theoretical benefits over a traditional fiat currency, namely ease of transacting, decentralization, privacy and defined limits on new supply. These advantages have led to excitement which has driven demand, and has generated large price gains for many cryptocurrencies.

However, most have proven to be a poor store of value and behave more like equities with high price volatility, meaning they are viewed more as a speculative asset class than a safe one.

Issues around security, possible technology obsolescence and the confusing amount of options have all added to these cryptocurrencies being viewed as a poor store of value – for now.

Although they are widely regarded as a safe store of value, fiat currencies have their own inherent risks. Because currencies are no longer based on the gold standard they rely on governments to manage them.

This level of centralized power allows governments to control the supply of money, allocate banking licences (which means they can decide who can allocate credit) and grant access to payment systems.

Cryptocurrencies give a viable alternative to government backed fiat currencies, with commodity backed cryptocurrencies in particular being theoretically a safe option. As mentioned there are credibility concerns with these “pegged” cryptocurrencies, with gold-backed cryptocurrencies have their own issues.

Quite aside from the issues with gold-backed cryptocurrencies, gold as an asset class has problems: It can’t be easily transported, must be secured at all times and like other asset classes experiences fluctuations in price.

However, unlike many other asset classes (fiat currencies included) gold does have an inherent value and has been traded in one form or another for many years. It is considered the best alternative to fiat currencies and has been used by investors as protection against inflation for many years.

Gold-backed Cryptocurrencies

GoldCrypto (located in Belize and issues AuX tokens) and Flashmoni (UK-based fintech operation issues OZGs and OZTs) are two examples out of many. This market is still unregulated and buyers should research these cryptocurrencies carefully before investing. There is a risk that operators may overstate their gold holdings or issue more coins than they have relative to holdings.

It is possible that a proliferation of gold-backed cryptocurrencies will drive an increase in demand for gold, push the price up, and entice more operators into the market. Again, this shows the need for due diligence on the part of the investor.

Because the market is unregulated with many malicious operators there is understandable mistrust around gold-backed cryptocurrencies. The most credible providers are the UK’s Royal Mint and Perth Mint – both government entities.

Subsequently, these providers don’t give users the opportunity to move away from governmental control. For trust to develop users will need transparency where they can easily understand who owns the gold and see how it is stored. If users can be clear on the underlying asset then gold-backed cryptocurrency can be a reliable store of value.

Ultimately the most successful gold-backed cryptocurrency is likely to be based in a reputable jurisdiction with a high degree of privacy. For example a gold-backfed cryptocurrency physically based in Switzerland would be a great opportunity, given Switzerland’s reputation and decentralized nature.