Of all the precious metals available, gold is the most popular when it comes to investing not just because it is a precious metal used across various industries but because it is an investment product that has a history of being used as a hedge against inflation and other economic turmoil. investing in gold has been classified as a way of diversifying risks in the financial market, especially when traded through derivatives and futures contracts.
Being a risk-off asset, it is concluded that the prices of gold tend to perform better when there is a challenge in the global economy – during wars, [global] crisis, whatnot, and shakedowns. However, the gold market is highly subjected to volatility and speculation as much as other markets are.
Gold in the Crypto Space: What is a Gold-Pegged Crypto?
Since people are coming up with new innovations to invest in a particular market without having to trade the market directly, Gold-pegged cryptocurrencies are ways one can get exposure to the gold market (by trading, purchasing, and every other investing exercise) without having to worry about a place to use for physical storage when the gold is in custody. Also, these innovative tokens have removed all possible inconveniences, ranging from transferability to transport, including illiquidity.
When compared with the traditional market, these gold-pegged tokens can be regarded as the gold CFDs and ETFs, which are used to track the price of gold in the market without owning them physically. In the crypto space, there are a number of tokens that are backed by the price of gold and, they are in different ratios depending on the buildup of the project itself.
The essence of this guide is to unveil the pros and cons of investing in gold-pegged tokens and also to highlight the various examples of the tokens available.
The Pros and Cons of Investing in Tokens Pegged to the Price of Gold
Definitely, as in every field and as with everything, there are definitely pros and cons attached to investing in the crypto market not to talk about investing in gold-pegged tokens. In this section, this guide will uncover the advantages and disadvantages of investing in the token pegged to the price of gold.
Pros of Gold-Backed Cryptocurrencies
The first on the list is that most of the tokens backed by gold are built to the ERC-20 standard, and by implication, they are easily tradable and transferable on different CEX and DEX.
Another thing is that gold-pegged tokens remove the illiquidity related to physical gold by allowing interested investors to trade the gold market at any time as long as their access to crypto exchanges is not denied. Another benefit of this innovation which is considered enormous is that they can be fractionalized and be split. This means that investors can be exposed to the gold market at just a fraction of the current price of gold without necessarily having to invest a huge amount of money in the market.
Other benefits of investing in gold-backed tokens are widely associated with the general crypto market, and they include the transferability and storage of the asset, unlike the physical gold. Also, most gold-pegged tokens can potentially be purchased through decentralized exchanges. This means that investors can enter the market without going through the hassle of KYC. This, however, is entirely impossible even when you are trading gold ETFs and CFDs.
Cons of Gold-Backed Cryptocurrencies
The first obvious disadvantage is that trading these tokens is not directly equal to trading the main gold market as they are just a derivative of the main market. This alone has a level of risks associated with it. And one of the reasons is that investors don’t have direct ownership of the gold their crypto is pegged to. The only upside to this is that it differs depending on the project; some projects allow for the physical redemption of your asset.
Also, talking about the risk of not owning the actual gold that your tokens are pegged to, the reliance is limited to some centralized service providers, which have the responsibility to manage the storage of the physical gold reserve that backs their tokens, but again, this is completely out of the control of investors.
Another disadvantage attached to these tokens is that most of them are ERC-20 tokens built on the Ethereum network executing transfers and purchases might require a huge amount of gas fees. Also, when compared with the traditional CFD (Contract for difference) markets, the liquidity of token pegged to gold are lower as the market is currently small compared to the legacy ones.
Another huge difference between these gold-backed tokens and legacy CFDs which is a disadvantage for the tokens is the vulnerability of the system, which gives room for exploits. This is because the chance of any smart contract failing is non-zero.
Top Gold-Pegged Tokens in the Crypto Space
Most definitely there are quite a few tokens in the crypto space that claimed to be pegged to gold based on the whitepaper and their PR, but this guide will cover two major tokens, which are Tether Gold (XAUT) and Paxos Gold (PAXG). Both of these tokens are issued by companies with a proven track record in the financial industry and can also boast of sufficient trading volume. The remaining tokens pegged to gold apart from these two are not bad but only fail in delivering substantial liquidity, and the content of their websites has not been updated for years, which can be considered a red flag.
1. Tether Gold (XAUT)
Market Cap: $453 million
Token Symbol: XAUt
Top Exchanges trading it: Uniswap, Bitfinex, FTX
In 2021, Tether – a company behind the most popular USD-pegged stablecoin, Tether US (USDT), announced that it has launched a new digital asset backed by gold, and it will be ticked XAUt. The token is built based on the Tron’s TRC-20 and Ethereum ERC-20 standards. Also, on a London Good Delivery bar, the token represents one troy fine ounce of gold.
People holding the XAVt will be able to acquire the undivided rights of ownership to gold on some specified gold bars. Their gold allocation can be identified via a unique serial number with specified purity and weight. Based on the company’s documentation, the holders of XAUt will also be able to check the details of gold bars that are allocated to their accounts/addresses through the website at any point in time.
Also, holders can make redemption requests for physical gold but they will be required to complete the verification process of TG Commodities Limited. This company is the one in charge of the token issuance. Other than the physical redemption, the token is easily tradable via some popular crypto exchanges like Bitfinex and FTX.
2. Paxos Gold (PAXG)
Market Cap (as of June 2022): $616 Million
Token Symbol: PAXG
Top exchanges trading it: Binance, FTX, Kraken, Uniswap, KuCoin
At the time of compiling this guide (in June 2022), PAXG is known as the biggest cryptocurrency pegged to gold based on the total market cap which is sitting around $616 Million. Also, the token boasts of the highest trading volume in 24 hours.
Based on the official whitepaper of the project, the PAXG token is equivalent to one fine troy ounce of physical gold with a specified gold bar with a serial number. Also, holders with enough PAXG own an entire gold bar, and they can redeem the token for a physical gold bar.
One of the benefits of owning this token is that the owner can be divided into smaller units up to 18 decimal points, allowing holders to get exposed to the gold market with a minimal amount. The token is built to the ERC-20 standard of the Ethereum network, which makes it portable across different networks.
Another thing to note is that the company issuing the PAXG token – Paxos Trust Company is a financial institution regulated and qualified as a custodian. The company is a state-chartered company that is regulated by the Department of Financial Services in New York (NYDFS), and the company is required to keep up to the highest standards possible in terms of customer assets protection. Furthermore, the PAXG token itself is regulated by the NYDFS.
3. Perth Mint Gold Token (PMGT)
Market Cap: $2 Million
Token Symbol: PMGT
Top exchanges trading it: Independent Reserve
PMGT is one of the few tokens pegged to gold that are validated by the government. With PMGT, all the gold purchased is stored and traded at the Perth Mint instead of having it held with a private company. The token has a 1:1 ratio with physical gold, and the current market cap is around $2 million. For every token purchase, buyers get digital gold certificates and these certificates can be exchanged for gold bullion which will be delivered to the address submitted at the point of registration/purchase.
For the transaction, there is no need for the investor to pay any transaction fees nor are they required to pay any fees for storage or any management fees, even if they choose not to keep the gold by themselves.
Currently, this token can only be acquired at Independent Reserve, even though talks are ongoing to get PGMT listed on other crypto exchanges.
4. Gold Coin (GLC)
Market Cap: $ 540,850
Token Symbol: GLC
Top exchanges trading it: Cryptoexchange.com and GoldCoin.com
The Gold Coin is developed by Digital Gold Limited and it is built to the Ethereum’s ERC-20 standard. This token was built by a group of financial advocates who strongly believe in the promotion of economic freedom. The current ratio of the token to the price of gold is 1000 GLC per ounce of gold.
The current market cap of the token is around $2 million. Every investor holding the GLC token have access to some unique features, and one of them is the 2-minute transaction confirmation speed which makes the token the fastest transaction out of all the token pegged to gold.
Gold Coin also gives its investors access to an exclusive GLC wallet for every gold purchased, and no fee is required for the transactions. This makes it really easy for investors to buy into the gold and also to hold it.
Crypto exchanges that have GLC listed include GoldCoin.com and CryptoExchange.com. Buying GLC on these platforms is quite easy as you can initiate a transaction with your debit and credit cards.
5. DigixGlobal (DGX)
Market Cap: $794,272
Token Symbol: DGX
Top exchanges trading it: CoinSquare
This token is created by a company based in Singapore that goes by the same name, Digix Global. This token is pegged to gold on a 1:1 ratio, which means that owning a DGX token is equal to owning a full ounce of gold. The current market cap of the DGX token is around $1.2 million.
Currently, the gold is stored in Canada and Singapore, which adds value to the token compared to every other gold-pegged token mentioned. Having the gold stored in different locations will mitigate the effect of having single storage compromised.
On every exchange, DGX charges a 1% fee which is assumed as the shipping (demurrage) fee. Currently, the only exchange that has DGX listed is CoinSquare, and the method of purchase is Ethereum (ETH) and Bitcoin (BTC.
6. AurusGOLD (AWG)
Market Cap: $2.2 Million
Token Symbol: AWG
Top exchanges trading it: CEX.io and Precious metal dealers like Aurica Group and Direct Bullion
AurusGOLD is a token minted by gold traders who arbitrage between the bullion gold markets and AWG. The market cap of the token is currently around $1.8 million. Each token represents one gram of gold supplied by LBMA – London Bullion Market Association refineries. However, if investors holding the token at any point have a change of heart from gold to other precious metals markets, AWG can help them diversify into the market. Also, investors can purchase other tokenized precious metals through the company the same way they would gold and have them transferred to their crypto wallet.
Aurus has partnered with several crypto exchanges to make the trading activities of the token easier. Also, the company partnered with a few precious metal dealers like Aurica Group and Direct Bullion. However, the most popular crypto exchange is CEX.io.
7. AABB Gold Token (AABBG)
Market Cap: $97.3 Million
Token Symbol: AABBG
Top exchanges trading it: AABB Website
This token is considered an anomaly in the crypto space mainly because the company behind it doesn’t have any previous experience in finance or cryptocurrency. AABB Gold Token was founded by Asia Broadband Inc. (AABB). The company is a resource firm focusing on the supply production and sales of base and precious metals.
Unlike other token pegged to gold which has their gold reserves sourced from different sources, the entire gold reserve backing the AABBG token come from the mining project of the company. This helps them to cut middlemen and also helps them to ensure that investors’ gold comes from the source directly. The AABBG token used a unique gold-backing format called Mine-to-Token, which verifies the gold assets attached to each token.
Currently, the total market cap of the token is $97.3 million, and it can only be acquired on the official website of the company using the company’s official wallet, AABB Wallet. The payment method required for the transaction is Ethereum and Bitcoin.
Conclusion
Despite being considered a safer investing option, owning physical gold is not as easy as it looks. Investors can hold it in form of physical bullion and keep it at home or organize a storage facility that will require payments or fees for holding them. This is one of the reasons Gold-Pegged tokens are considered a better option for individuals interested in investing in the gold market without worrying about where to store them.
Since it is looking like a more convenient and cheaper alternative to get exposure to the gold market, it will not be surprising to see the dominance of gold-pegged tokens as a new form of ownership of gold in the nearest future.
Combined with other decentralized finance (DeFi) projects and some other DEX – Decentralized Exchanges, programs like liquidity pools and lending can allow investors to earn interest on their gold deposits as it is with other crypto assets. Currently, there are some ongoing experimental projects that are intending to create digital assets that will have their value derived algorithmically from assets, rather than basing it on the asset deposits.
As a way of conclusion, the list in this guide is not exhaustive, there are more gold-pegged tokens that did not make the cut into this guide. However, the list is not prescriptive; the content of this guide is not in any way an investment or financial advice. Every financial decision taken on account of the content of this guide is solely at the readers’ discretion. It is absolutely necessary that you are educated more on the intersection of cryptocurrency or decentralized finance and the traditional gold market.
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