What is a Gold-backed Token?
Gold-backed tokens are backed by real gold reserves. The issuer of the token publishes a new token that reflects the value of real gold reserves in a predetermined ratio. The value of the gold-backed token is directly proportional to the spot market value of gold. It is used for transactions in the same manner as other digital assets.
The main reason for issuing gold-backed cryptocurrencies is to tie the value of digital assets to a tangible asset. In this manner, the investors are protected against massive price fluctuations.
On this account, gold-backed cryptocurrencies are more stable in comparison to other digital currencies. It happens because gold prices have less volatility in comparison to other asset classes such as stocks and cryptocurrencies.
At the same time, gold-backed tokens are utilized as a hedge against inflation. In this manner, the price of gold-backed tokens remains stable while the price of other investment products declines.
Gold-backed tokens are listed on trading platforms that allow investors to purchase stake in real gold in a digital platform. Thus, investors are able to swap purchased tokens for real gold.
How does Gold-backed Token Work?
Gold-backed tokens are stored in verified and secure reserves. These reserves are managed by banking firms or private entities. The backing ratio of a gold-backed token can vary but it is usually set at 1:1 meaning that 1 unit of token represents 1 gram of gold. There are also tokens that represent one fraction of an ounce.
When an investor purchases a gold-backed token they gain the propriety over the real gold reserves in the same proportion. In terms of design, gold-backed tokens are usually generated as per ERC-20 standardization. It means that they are stored in an ERC-20 supporting wallet.
What are Gold-backed Stablecoins?
Gold-backed tokens are also stablecoins that retain the same unit value at all times. Therefore, gold-backed stablecoins are considered a type of real-world asset-backed cryptocurrencies. Here are important factors that are practical use cases for gold-backed stablecoins:
- Gold-backed stablecoin grants investors the ability to purchase real gold without directly storing or guarding it.
- Gold-backed investors get a serial number that allows them to track the real gold bar that represents the value of their purchase.
- Gold markets gain momentum during economic or political uncertainty. Therefore, gold-backed token investors can leverage the rising value of real gold to generate profits.
- Gold-backed tokens are more accessible for investors and have more user-friendly storage facilities.
- In comparison to real gold bars, gold-backed tokens are more divisible, transferable, and tradeable on account of their digital nature.
Advantages of Gold-backed Token Investing
- Gold-backed tokens are present in a digital form therefore they are easier to trade, store, and trade.
- Gold-backed tokens are pegged to the value of real gold. In this manner, the price of the backed tokens does not crash while other digital currencies are undergoing a decline.
- Gold-backed tokens serve as a hedge during periods of high volatility in the cryptocurrency market.
- Gold-backed tokens grant access to traditional trading products such as ETFs.
- Gold-backed tokens bring more diversity in the trading portfolio of cryptocurrency investors in addition to derivatives and spot market products.
Risks Associated with Gold-backed Token Investing
- Gold-backed tokens do not grant investors a 100% guarantee of maintaining their value based on the issuing company.
- Gold-backed tokens prices can decline if the price of real gold depreciates. However, gold is one of the most stable trading markets and eventually recovers its value later.
- Gold-backed tokens may have low liquidity on account of low trading volume. At the same time, gold-backed token listings on crypto exchanges are also limited.
- The reserve declaration for gold-backed tokens can be wanting in accuracy. Therefore, investors may not have absolute certainty about the presence of real gold to back every unit of backed currencies.
Conclusion
Gold-backed tokens are a new concept that is gaining popularity at a rapid pace. It emulates the same effect in DeFi as the gold standard for government issued legal tender. However, investors should invest in verified gold-backed token issuers who ensure transparency of backed reserves by gathering necessary information.
