Understanding Crypto Backed By Precious Metals
The idea of virtual currency backed by bullion like gold and silver has been tried numerous times. Arguably the most successful before the advent of cryptocurrencies like Bitcoin was E-Gold, co-founded by Douglas Jackson. The coin proved to be very popular at its peak in the 1990s, with at least 1,000 new accounts made each day. However, authorities cracked down on the coin and mandated Jackson to adhere to a variety of financial regulation rules and standards, turning E-Gold into a shadow of its former self.
An ideal modern-day stablecoin should be able to perform main functions. It should have the capability of acting as a medium of exchange to permit holders to buy and sell goods, function as a saving asset , and be used as a unit of account to compare the cost of goods and services.
Stablecoins backed by precious metals stand out for a few reasons. Cryptos backed by fiat currency, like Tethers USDT, remain the most well-known class of stablecoins. But many are wary of fiat currencies long-term stability, especially in 2020, as national governments pursue a variety of artificial stimulus to keep economies afloat during the coronavirus.
You May also be Interested In:
Rise Of Cryptocurrencies Can Be Traced To Nixon Abandoning Gold In 1971
The decision has led to volatile financial markets, geopolitical tension and inflated asset prices
Few dates in economic history classify as turning points but one of them was 15 August 1971 when Richard Nixon went on TV to announce that the US would no longer exchange dollars held by foreign governments for gold.
Nixons announcement 50 years ago this week had lasting ramifications. It was a statement to the world that the US was too weak to continue anchoring the global monetary system as it had done for the past quarter of a century. It would remain the worlds biggest and most important economy, but the days when it was uniquely dominant were at an end.
Shock waves from Washingtons decision to break the link with gold have rippled down the decades. The creation of the euro, the hollowing out of US manufacturing, the arrival of cryptocurrencies and the ability of central banks to print seemingly unlimited quantities of money can all be traced back to August 1971.
In truth, Nixon had little choice because the system of international economic management established at Bretton Woods in 1944 was breaking down. Under the agreement, currencies such as the pound, the French franc and the German mark were linked to the dollar at a fixed exchange rate. To ensure the stability of the system, the dollar was fixed to gold at a rate of $35 an ounce. Any country that built up a stock of dollars by running a trade surplus with the US could exchange them for gold.
Digital Cash Or Internet Money
Internet money is exactly what it sounds like you use it to buy things over the internet.
Bitcoin was originally intended to be digital cash, but speculation led to the creation of another cryptocurrency, Bitcoin Cash . Bitcoins price was too volatile for it to be a suitable currency, which proponents for Bitcoin Cash argued was the entire point of the currency to begin with.
There was a big debate about what the future of Bitcoin was going to be. Was it gold or was it cash? The people who wanted it to be more like gold won out, says Moore. The decision was a turning point for Bitcoin where it really went down to be digital gold.
But the group that wanted Bitcoin to remain internet money split off or forked, in crypto parlance the currency and created Bitcoin Cash. The network is devoted to digital payments . In these ways, Bitcoin Cash is meant to be cash. Thats the value proposition, says Moore.
Though Bitcoin Cash is designed and intended for transactions, its price is still volatile and probably not your best option for making or receiving payments.
Don’t Miss: How Much Money Does Crypto Mining Make
A Currency Must Evoke Confidence
A $50 note in your pocket has no intrinsic value. To use the banana metaphor, the paper itself is worth less than a banana. Yet we have great confidence in that note and can buy many bananas with it.
When the US Dollar was removed from the Gold Standard in 1977 a lot of leading economists and bankers were nervous. If that $50 dollar bill in your pocket was no longer exchangeable for real gold, they thought, there might be widespread panic and a collapse of the monetary system. Nothing of the sort happened and the US Dollar has been the stable basis of a large part of the worlds economic growth for half a century now. In fact, most agree today, that this growth would never have been possible if the Dollar had stayed on the gold standard.
The same thing happened in many other currencies and today, currency is basically just another word for confidence. If a government can maintain confidence in its currency, then all is fine. And as we have sadly seen in countries where confidence in the currency is lost, the currency collapses with often devastating effects for the population.
Where Can You Buy Gold
In order to be able to purchase any of the above mentioned gold-backed cryptocurrencies, you will first have to convert fiat currency into other popular cryptos, such as Ethereum or Bitcoin, as there are no platforms that let you buy them directly with fiat.
Most exchanges list gold- backed coins in pairs with Bitcoin or Ethereum, but there are a few exceptions such as The Midas Touch Gold that can be traded against USDT. But such options are very scarce.
If you are interested in purchasing the coins in Initial Coin Offerings, then Ethereum might be the only option available, as most of these projects are issued on the Ethereum blockchain.
Recommended Reading: How Much Cryptocurrency Should I Buy
Choosing Solid Ground For A Stablecoin Project
Thus, we can conclude that by using gold as the underlying layer to a stablecoin, its creators increase the chances of a project failure.
However, its unlikely that these statistics are reviewed by many of the industrys finest. Tether , a controversial but significant platform issuing stablecoin, has recently announced its plans regarding the launch of a digital asset providing exposure to physical gold . There have been reports of other crypto-based platforms also working on similar products such as Coin Shares, which has been exploring the possibility of launching a gold-backed cryptocurrency. While Bitcoin has often been regarded as digital gold, only the future will tell whether either Tether Gold or another similar project comes out on top.
Despite the fact that the possible benefits of fusing both physical and digital assets may look lucrative, this is not timely innovation in crypto ecosystems. Tether is infamous for having problems with auditing fiat, which can easily be audited in electronic form. Moreover, as gold can be easily replaced with Tungsten, only more auditing issues arise.
Related: Tether Case, Explained
Moreover, it can be used to fix the gap between the classical financial industry and steadily maturing digital assets.
The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Pros And Cons Of Gold
- Stable. Legitimate gold-backed cryptocurrencies mirror gold prices and are much more stable than most other cryptocurrencies.
- Reliable store of value. People who are worried about inflation or the security of fiat currency may prefer to store their value as gold.
- Allows access to blockchain apps. Tokenising gold on the blockchain lets you use gold across blockchain applications, to trade it, spend it as money and more.
- Easier to store and sell than gold. Purely digital gold tokens are typically easier to store and sell than physical gold.
- Less stable value than gold. Gold-backed cryptocurrencies are often more volatile than gold itself.
- Disreputable projects are common. Many gold-backed cryptocurrency projects are either lying about their backing or are outright scams.
- Requires some trust. Even the most honest and transparent gold-backed cryptocurrencies require some kind of trust between you and the token issuer.
- May involve fees. The costs of physical gold custody or other expenses may be passed on to users in the form of additional fees.
- Limited liquidity and exchange availability. The availability and liquidity of gold-backed cryptocurrencies on exchanges may be limited.
Don’t Miss: How To Receive Crypto Airdrop
Pegged Digital Cryptocurrencies In A Nutshell
Cryptocurrencies that are pegged to a certain asset are called stablecoins. As the name suggests, stablecoins are designed to stabilize unpredictable and volatile cryptocurrencies. How that stability is achieved varies depending on which asset is pegged to the crypto.
Stablecoins have become pretty famous over the last couple of years because it offers the instant processing and high security of privacy in the payments of cryptocurrencies while carrying the stable and less-volatile dynamic of fiat currencies. It basically represents a fast and inexpensive alternative to fiat currencies and a means of avoiding crypto’s volatility.
Technically, any asset can be used as backing for a cryptocurrency, but the most obvious choice is probably gold and reliable fiat currencies like the US Dollar. Usually, the developer of the stablecoin will set up a “reserve” to store the asset that backs the stablecoin. For example, $1 million is stored in an old-fashioned bank to back up a million units of a stablecoin.
That is one way to peg a stablecoin with a real-world tangible asset. The asset in the reserve serves as collateral for the stablecoin, so if the stablecoin holder wishes to cash out their tokens, they will get an equal amount of the asset from the reserve.
Top Cryptocurrencies Backed By Gold Silver And Other Precious Metals
Top cryptocurrencies backed by Gold, Silver, and other precious metals. For the past several years, Bitcoin and other decentralized cryptocurrencies have grown in popularity.
Stablecoins are linked to various assets like dollars or precious metals. These include gold, silver, platinum, and palladium, and these unions create entirely new crypto-like Platinum Coin or Silver Coin.
Crypto backed by precious metals are gaining more attention and appreciation, which means that it is essential to understand what they are.
Recommended Reading: How To Buy Things With Bitcoin
Cryptochips: Why Should You Invest
Investing in Crypto currencies is a great way of securing your financial future today and for the future as well. A good approach towards investing in this market is to follow the example of professional investors. Here are some of the things they do when they invest in CryptoChips and other forms of currencies.
Simple and plain investing into Crypto currency isnt always a very good strategy to build long term wealth for yourself. Don t mess around with buying some Crypto coins for your virtual wallet if you want to have a solid investment. There are plenty of great resources available on the internet that offer information about these types of investments so why would you consider starting at home when you can follow the example of professional investors?
With investing in CryptoChips you should know what it is you are looking to secure. Most people want to invest in Cryptocurrecto currencies because they are easy to buy and sell and they also transfer very quickly from one place to another. Crypto Currency can be used to trade online, which is one of the benefits. It is easy to see how people trade Cryptocurrecto. They can be used to track multiple currencies simultaneously or exchange between them. This is a major attraction for those who like trading multiple times in the same day and for those who want to keep their money in a safe place.
Difficulties Of Valuing Bitcoin
This is a rather simple long-term model. Perhaps the biggest question it hinges on is exactly how much adoption will Bitcoin achieve? Coming up with a value for the current price of Bitcoin would involve pricing in the risk of low adoption or failure of Bitcoin as a currency, which could include being displaced by one or more other digital currencies.
Models often consider the velocity of money, frequently arguing that because Bitcoin can support transfers that take less than an hour, the velocity of money in the future Bitcoin ecosystem will be higher than the current average velocity of money. Another view on this, though, would be that velocity of money is not restricted by today’s payment rails in any significant way and that its main determinant is the need or willingness of people to transact. Therefore, the projected velocity of money could be treated as roughly equal to its current value.
Another angle at modeling the price of Bitcoin, and perhaps a useful one for the near-to-medium term, would be to look at specific industries or markets one thinks it could impact or disrupt and think about how much of that market could end up using Bitcoin. The World Bitcoin Network provides a nifty tool for doing just that.
Recommended Reading: Can You Trade Bitcoin On Robinhood
Gold Vs Crypto Why Not Have Both
In a world of increasing innovation, investors no longer need to choose between owning gold or cryptocurrencies, both are on offer. The world of commodity backed cryptocurrencies is flourishing, and as you can see from this top 5 gold backed cryptocurrency list, so are they. Get your hands on all things crypto through the simplified Oobit platform.
Perth Mint Gold Token
This gold-backed crypto is one of the most popular on the exchange platforms, as it is pegged to gold blocks from Western Australias Perth Mint. The Australian government guarantees the purity and weight of the gold, and the Mint issues digital gold certificates via the GoldPass app. PGMT gold coins are backed by the certificates with a 1:1 ratio.
Traders can exchange tokens with others on various exchange platforms or fully redeem their coin holdings for physical gold. The current market cap stands at just over $1.5 million.
You May Like: How To Mine Cryptocurrency 2021
Why Cryptocurrencies Backed By Gold Are A Terrible Idea
Digital gold, that is the nickname some have given to Bitcoin. That is because Bitcoin is the first widely used deflationary medium of exchange in the market since gold. Maybe this has opened the door for those who suggest that cryptocurrencies backed by gold could not only be feasible but could actually make the esoteric nature of a decentralized, digital asset, disappear. People are used to gold, but not to cryptocurrencies, the argument goes. Well, that is precisely the problem: backing the unknown with something familiar doesnt change anything. In fact, the very suggestion that this can or should be done exposes deep logical flaws. Here is why cryptocurrency backed by gold is such a bad idea.
Is Bitcoin Gold Backed By Gold
The short answer is no Bitcoin is not backed by gold. That does not mean it has no value, but Bitcoin isnt connected to any physical asset, whether its gold, silver, oil, or any other commodity.
However, Bitcoin did contribute to the rise of gold-backed cryptocurrency. Before Bitcoin and blockchain gained popularity among traders and investors, cryptocurrency was virtually unheard of within the general public. As Bitcoin emerged, allowing traders to exchange and invest with minimal effort, more people began to invest in it and other cryptos.
That includes gold-backed cryptocurrency. While gold-backed crypto existed as far back as 1999, it didnt take off until after Bitcoin did. That doesnt mean all of these new cryptos become well-known or widespread now. Most dont.
Some people prefer gold-backed cryptocurrency over Bitcoin because they feel it is more secure with a tangible asset attached to its value. It has a guaranteed threshold for what its worth.
On the other hand, its harder to keep track of physical gold in vaults as digital coins are made. Compare that to blockchain technology, which keeps track of Bitcoins. If youre investing in gold-backed cryptocurrency, you also want to make sure your investmentincluding the goldbelongs to you.
Recommended Reading: What Is Cryptocurrency Based On
The Advantage Of Metal As A Reserve Asset
Countless civilisations have treasured precious metals like gold, silver, platinum, and palladium for their utility and beauty. Bullion is recognised and accepted across the world for buying and selling.
While many think precious metals are only valuable as a monetary tool, many have a wide range of industrial and manufacturing uses. Palladium is a vital component in catalytic converters to remove hydrocarbons, carbon monoxide, and other potentially harmful gases from vehicle exhaust emissions. The converter is one of the most expensive parts of a vehicle often costing up to $1,000 alone.
The vast majority of silver mined in the modern world is a byproduct of manufacturing. The industrial uses of precious metals give them an additional allure of value, making them in the eyes of some a stronger stablecoin base than fiat currencies stablecoins like Basecoin.
Cryptocurrencies Backed By Gold Dont Have Backing All The Time
There are other issues that seem to be too complicated to solve when it comes to cryptocurrencies backed by gold. For instance, how can anyone guarantee that there is enough gold to back the number of coins in the market at all times? How would the coins creators issue and control the money supply to ensure this is the case and make all their work independently verifiable? Controlling the money supply in a system is extremely complex there are bound to be mistakes, even if the creators of the coin are honest brokers. These mistakes will effectively undermine the coin itself.
You May Like: Can You Use Bitcoin To Buy Things