Many people are exploring new ways to diversify and grow their investment portfolios in the 21st century. Gold-backed cryptocurrencies are becoming increasingly popular among amateur and veteran investors, offering fast transactions and protection against inflation.
You may wonder, “What are gold-backed cryptocurrencies, and are they a smart investment for me?”
The crypto experts at Learn About Gold share the following beginner’s guide for these modern investments. Review the information below, then partner with a gold IRA broker to plan your financial future.
What Is a Gold-Backed Cryptocurrency?
As the name suggests, gold-backed cryptocurrencies are digital assets tied to real, tangible gold. You can hold these alternative investments and watch them grow in accordance with gold’s market price.
Unlike conventional stocks and crypto, gold-backed cryptocurrencies are less volatile and not prone to dramatic price fluctuations.
You can purchase and sell this type of cryptocurrency through exchanges. Many online vendors also accept gold-backed crypto as a valid form of payment for goods and services.
How Do Gold-Backed Cryptocurrencies Work?
Once you purchase gold-backed cryptocurrency, you will receive a unique serial number corresponding to a real unit of physical gold in storage.
Banks and third-party custodians handle most of the security and storage responsibilities associated with physical gold. Using crypto allows you to trade tokens freely without worrying about these expensive logistics.
Gold reserves usually back these assets at a one-to-one ratio. In other words, one token of a gold-backed cryptocurrency equates to one ounce of gold, depending on the crypto you choose.
Ethereum’s ERC-20 standard tokens support most gold-backed cryptocurrencies. However, you can explore other exchanges if your digital wallet does not accept this token type.
Brief History of Gold-Backed Cryptocurrencies
Investing in tangible assets, like physical gold, is an excellent way to create a financial safety net during an economic disaster. For thousands of years, cultures around the world mined gold to legitimize status, engage in lucrative jewelry trades, and incorporate these metals into developing technologies. Consequently, gold became a universally reliable and sought-after asset.
In the mid-1800s, the United Kingdom and the United States created fixed-rate currencies backed by gold to support the growing international economy. Although the United States ended its relationship with gold and silver-backed dollars in the 20th century, investors continue to trade and store physical gold, reinforcing their portfolios against cyclical market crashes.
Many mainstream crypto exchanges began to emerge in the early 2010s. Investors now rely on these channels to manage and trade their gold assets faster than ever before.
List of Some Gold-Backed Cryptocurrencies
The crypto market is expansive and always changing. However, finding the right gold-backed cryptocurrency doesn’t need to be a hassle. Below is a list of popular crypto options you should explore before making your first purchase:
Tether Gold (XAUt)
Tether Gold is a relatively new stablecoin launched in 2020 during the economic uncertainty of the COVID-19 pandemic. Despite its recent entry into the crypto market, XAUt holds the title of being the largest gold-backed cryptocurrency on the market. Here are a few notable XAUt features:
- Investors must make all XAUt purchases in USD
- One token equates to a single troy ounce of fine gold
- Investors can transfer an on-chain Tether wallet to another
- Investors can redeem and ship physical gold to Switzerland after collecting a specified amount of tokens
- Investors can redeem and sell gold for cash if they don’t want to hold their precious metal assets
Digix Gold Token (DGX)
The high price of gold may discourage new users from investing much in the crypto market. Thankfully, you can purchase and trade small yields using Digix Gold Token, a crypto more accessible to investors on a tight budget. You can expect the following features when choosing DGX:
- A transparent buying process that allows users to avoid scams
- One token equates to a single gram of gold supported by PAMP, Metalor, or other reputable precious metal refineries
- DGX tokens do not have corresponding storage fees
- Exchange authorities regulate DGX tokens, exchange-traded funds, and physical gold assets
- The minimum purchase rate for DGX is 50 cents
Pax Gold (PAXG)
If you want to invest in high-quality gold products from conventional markets, Pax Gold is a practical choice. The New York State Department of Financial Services monitors and regulates this token, making it a safe investment for some.
- PAXG requires no custody fee for tokens (limitations may apply)
- Each token equates to one ounce of fine gold
- Investors can enjoy fast and easy settlements
- Investors can also trade PAXG as futures (not regulated by the NYDFS)
- PAXG requires a $20 minimum investment for one troy ounce of gold
- PAXG requires an $800 minimum investment to redeem a 400-troy-ounce gold bar
Perth Mint Gold Token (PMGT)
PMGT is another manageable and affordable option for investors worldwide. Unlike some gold-backed cryptocurrencies, investors can feel confident about redeeming their assets knowing the Government of Western Australia issued a guarantee for PMGT gold held in its central reserve. Here are a few of PMGT’s notable features:
- Investors can purchase and trade PMGT tokens at a one-to-one-ounce ratio
- Australia publishes the records of Trovio GoldPass accounts, allowing investors to monitor and confirm the legitimacy of every gold-backed token
- Investors should not expect a minimum fee to purchase PMGT tokens
GoldCoin (GLC)
Many investors rely on the cryptocurrency market to avoid limitations imposed by centralized authorities and regulators. GoldCoin is a popular choice for its peer-to-peer trading mechanics. This highly transferable and divisible crypto allows you to convert tokens into your choice of fiat any time you please.
- 1000 GLC tokens equate to one ounce of 99.9% pure gold
- Investors can navigate trades through on- and off-chain scaling mechanics
- No minimum token purchase is necessary
- All tokens must have proof-of-work backing to reduce the risk of scams
What Factors Should You Consider Before Investing?
It’s wise not to trade gold-backed cryptocurrencies without reviewing some key considerations.
First, you should determine your investment budget for cryptocurrency. Trading gold via conventional exchanges can be expensive, depending on which crypto you choose. If you don’t have a lot of money to invest right away, options with lower buy-in rates, like GLC or PMGT, may be more practical than pricey alternatives, like PAXG.
You should also understand that not every crypto comes with a gold-redeeming guarantee. Many investors place a lot of trust in central custodians to manage and protect their stored gold reserves. In some cases, counterparty mismanagement can lead to expensive losses.
Cryptocurrency is evolving quickly. Regulations and laws regarding gold-backed tokens could change suddenly, encouraging you to rethink your investment strategy. It may be wise to avoid placing all your eggs in a single basket to avoid potential financial headaches down the line.
How Do Gold-Backed Cryptocurrencies Compare to Other Investment Options?
Most investors agree that gold-backed cryptocurrencies are more stable than conventional crypto, like Bitcoin or Litecoin. That is because the value of these tokens directly corresponds to the current market price of physical gold. It can be easier to predict the short-term value of gold than that of intangible assets susceptible to dips and crashes.
Some cryptocurrencies do not allow you to redeem real cash. In contrast, gold-backed tokens allow investors to convert and sell their precious metals instantly.
What Are the Advantages of Gold-Backed Cryptocurrencies?
There are five primary reasons modern investors choose gold-backed cryptocurrencies over conventional market assets:
- Reliability: As mentioned earlier in this article, the value of gold rarely crashes, even during periods of economic crisis. Therefore, gold-backed tokens allow investors to protect their portfolios with a stable asset.
- Transferability: Crypto is easy to buy, sell, and move with just a few clicks. High liquidity also assures investors they can convert their crypto into cash corresponding to the current price of gold.
- Scam prevention: Blockchain security is essential for monitoring modern cryptocurrency markets. Investors enjoy relative transparency during sales when trading gold tokens on an exchange.
- Cost efficiency: Many people choose not to invest in gold because of the additional expenses tied to storage and transportation. You can freely trade these assets with gold-backed cryptocurrencies without worrying about extra maintenance fees.
- International validity: You can buy and sell gold tokens in nearly every country.
Are There Any Risks to Investing in Gold-Backed Cryptocurrencies?
You should expect some risks when investing in gold-backed cryptocurrencies. Here are a few things to remember while trading:
- Governance: Crypto supported by legally recognized gold facilities often require a financial commission or government agency to regulate and manage the corresponding asset reserve. For many investors, this process of centralization defeats the purpose of trading cryptocurrency in the first place.
- Conversion costs: Trading gold-backed tokens online is an excellent way to complete deals quickly. However, you may need to pay for additional custodial services (storage and maintenance) once you redeem your physical gold or convert tokens into cash.
- Low volume: Gold is a limited precious metal. Consequently, many crypto exchanges issue a purchase cap on certain tokens.
What Are the Growth Potential and Market Projections for Gold-Backed Cryptocurrencies?
In 2022, the market cap for gold-backed cryptocurrencies will hit an unprecedented $1 billion. PAXG contributed the most that year, injecting around $500 million into the market.
Investors expect the value of PAXG and XAUt to continue rising slowly in the 2020s. However, international conflicts and looming recessions make the future of these cryptos somewhat difficult to predict as of this writing. It’s best to partner with a trusted financial advisor and stock monitor to keep up with these rapid changes.
Security and Auditing of Gold-Backed Cryptocurrencies
In September 2022, the U.S. Securities and Exchange Commission (SEC) charged several crypto firms and celebrities with scams related to gold-backed tokens. The result has many crypto enthusiasts wondering how safe their investments are in this developing marketplace.
Ongoing security and auditing are essential to managing gold-backed cryptocurrencies. Here are a few questions you should ask before investing:
How Is Security Ensured?
Some gold reserves, such as the Perth Mint, guarantee security and conversions for their investors. Serial numbers provided by tokens allow users to track and monitor their gold in storage. Always ensure you trade on a secure exchange to avoid surprise losses.
What Are the Auditing Processes and Transparency Measures in Place?
Debates about whether cryptocurrencies are securities, commodities, or something entirely different are ongoing. The Commodity Futures Trading Commission (CFTC) audits cryptos determined to be commodities or currencies. On the other hand, the SEC regulates cryptos that act as stocks or ETFs.
The Howey Test helps government agencies determine whether crypto transactions are legitimate and if they qualify as securities.
Blockchain technology allows investors to view their trades in a transparent environment.
How Are Fraud and Counterfeit Issues Prevented?
Phishing scams, social engineering frauds, and theft impact some areas of the crypto industry. Protect your gold-backed investments by staying vigilant in the following ways:
- Read a relevant white paper to see protocols, blockchain methods, and formulas associated with your chosen token. Fake cryptocurrencies do not have this type of validation.
- Research the team tied to the crypto to determine whether they are legitimate or fraudsters.
- Avoid deals that appear too good to be true, such as “free drop coins.”
- Report any suspected scams to relevant authorities.
How Can You Invest in Gold-Backed Cryptocurrencies?
Anyone can buy and sell gold-backed cryptocurrencies with a verified account tied to their crypto exchange of choice. Some exchanges allow you to transfer wallets to other accounts supporting the same crypto token type.
Binance, Kraken, Bitget, MEXC, and Bybit are five popular exchanges offering gold-backed investment options. The verification process can sometimes take a few hours or even days to complete. Once you receive confirmation, follow the instructions to start your investment journey.
If you are new to trading gold or gold-backed assets, consider hiring an investment advisor to help you navigate the process.
Are Gold-Backed Cryptocurrencies Regulated?
Most reputable gold reserves undergo full audits by government authorities on a routine basis. Regulations help marketplaces prevent scams and avoid illegal activity that may cost investors thousands of dollars in losses.
Government agencies take these audits seriously. Between 2020 and 2023, the SEC and the CFTC cracked down on numerous high-profile exchanges, including the largest crypto exchange in the world — Binance — for allowing users to trade unregistered securities and assets.
Investors should not rule out the possibility of tighter restrictions and regulations on gold-backed cryptocurrencies in the future.
The Takeaway
Exploring gold-backed crypto can be exciting and offer you a wide range of new investment opportunities you might not have considered before. However, it’s important to consider all the risks and rewards before making your first purchase.
At Learn About Gold, we help people like you understand the value of precious metals like gold and silver. Our online portal lets you connect with a gold IRA partner to see which investment options suit your budget and long-term needs.
Continue exploring our resources to learn more about how gold-backed cryptocurrencies work, or speak to a professional over the phone. We will educate you on how the gold market functions and the potential problems you might encounter throughout your investment journey.
Do gold-backed cryptocurrencies seem like a good investment for you? Contact Learn About Gold today to partner with an expert. Fill out this 30-second form if you have any questions or concerns.
