The reason behind why Gold-backed Cryptocurrencies are on the rise| (Part 1: Introduction & Overview)

The history of Gold

Gold has occupied a unique social status for millennia. It has a long history as a valuable metal and its history is far from over. From the ancient Egyptians to the modern U.S. Treasury, there are few metals that have had such an influential role in human history as gold.

In the late 18th century, a gold standard was established by the US and in 1944, gold prices were pegged to the US dollar. However due to the Vietnam war in the 1970s, the gold exchange standard collapsed as America’s budget was devastated by the war. With that, gold prices sky-rocketed from $35 per ounce to above $800 per ounce.

In the present day, there are no currencies right now that are backed by gold. However, many countries still hold large reserves of gold to defend their currency against future emergencies. Gold is viewed by many as a smart investment vehicle in the recent years and is seen as a safe haven for investors as well.

Top 10 investment vehicles

Gold is considered to be the top 10 investment vehicle for a good amount of reasons. The prices of gold have been increasing since the 1970s from $35 per ounce to nearly $2000 per ounce in August 2011. Like any other investments, it is not a smooth upward trends having gone through numerous ups and downs.

There are a number of factors which make gold valuable.

  1. Scarcity: Gold is rare and difficult to find. It cannot be printed like fiat currency, but rather it has to be mined.
  2. Physical attributes: No metal is more malleable and ductile than gold and this makes it a very effective material when used in electrical appliances, especially since gold is an excellent conductor.
  3. History: On the contrary to what analysts say about gold being a bad investment, Gold has been in an uptrend since the 1970s. Also, over the course of history, Gold’s purchasing power has endured through ancient civilisations up till today.
  4. Reduced counter party risk: Gold is a financial asset that is not simultaneously someone else’s liability. Gold does not require the backing of any banks, firms or even the government, thus it is unable to suffer a default and its value will not fall to zero.
  5. Wealth storage: Gold’s purpose is as a long-term store of value, and as insurance against crisis and inflation. With no counter party risk and excellent liquidity, gold is extremely valuable as a financial asset.
Gold’s Performance as of Jan 2019

Safe and stable storage of value

Gold has a market cap of about $8 trillion. The prices of gold are considered relatively stable and the fluctuations are usually not more than 5%.

The chart shows the performance of gold as of Jan 2019, the returns are usually quite stable as gold will always retain its value into the future.

Gold-backed cryptocurriences

With gold being such an instrumental and valuable financial asset, there were attempts in the past to create a digital gold currency, but that was before the age of blockchain. Now with blockchain technology established as a secure accounting method, and with Bitcoin becoming better known to the general public, a new era of gold-backed cryptocurrency is emerging.

There are some risks involed as well, while the blockchain accounts for the coins, accounting for physical stored gold is another matter. When evaluating such tokens look for who actually possesses actual gold reserves and how safely the gold is stored.

Tokenomy for Gold-Backed tokens

Generally, the tokenomy is that a token or coin that is issued is represents a certain value of gold, usually 1 token = 1 gram of gold. The gold is kept in a safe storage by a trusted custodian (usually a third party) and can be traded with coin holders. The minimum price of the coin will always equal the current gold rate which works like a built-in stop-loss.

Hassle free redemption channel between Crypto and Gold

By owning these gold-backed tokens, users are able to exchange it for gold when the situation calls for it. These gold-backed tokens have reduced counter party risk as you are able to transfer the ownership of the tokens to reduce counter party dependencies. In the case that the company issuing the token run into liquidity or financial issues, the token owners can still redeem the coin for gold.

A simplified redemption process of Gold using the gold-back tokens

However, in the current crypto and gold market, a quick and easy channel to convert between gold and crypto does not exist yet! This channel is now made possible with gold-backed tokens as seen in the above diagram of how straightforward the gold redemption using gold-backed tokens could potentially be!

Stay tuned to upcoming articles where we will be providing more insights on gold-backed tokens as well as how Tokenize is moving towards our very own gold-backed tokens!


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