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A gold-backed cryptocurrency: Key options and challenges
Looking to protect your wealth while remaining within the world of digital assets Intrigued by the idea of a gold-backed token cryptocurrencies for gaining exposure to gold and how they work. The precious metal, renowned for its stability, can now be purchased as a gold-backed cryptocurrency . This provides access to the security of physical gold while maintaining the flexibility of a crypto wallet .
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Why choose a cryptocurrency collateralized by gold?
The concept of digital gold arose from the desire to combine the solidity of a precious metal with the innovation of blockchain . This is often referred to as gold tokenization or tokenized gold . You thus hold a gold token representing a real fraction of physical gold stored in certified vaults.
Here are the major advantages that result:
- Security : Gold is considered a historical safe haven, particularly in the face of inflation, which erodes currency value over the long term. To concretely measure this effect, discover our inflation calculator between two dates , a practical tool to visualize the loss of purchasing power over the years.
- Liquidity : Gold-backed cryptocurrencies are traded 24/7. You can buy or sell at any time.
- Fractionation : You can hold very small shares of gold, which facilitates asset allocation and diversification .
- No storage : Unlike physical gold, there is no need to find a safe place or pay vault fees.
For some time now, these alternative investments have been increasingly popular among DeFi . Gold-backed stablecoin even allow investors to generate returns by providing liquidity on decentralized exchange platforms.
Top Cryptocurrencies for Gold Exposure
Several projects have emerged to offer exposure to gold via blockchain . We will focus on three major tokens: Pax Gold (PAXG), Tether Gold (XAUT) and Comtech Gold (CGO).
Pax Gold (PAXG)
The gold-backed token is undoubtedly Pax Gold. Each unit of PAXG corresponds to one troy ounce (31.1 grams) of London Good Delivery quality gold, stored in vaults approved by the LBMA (London Bullion Market Association).
- Issuing company: Paxos Trust, regulated by the New York State Department of Financial Services (NYDFS).
- Proof of reserves : Monthly audits are carried out by the independent company Withum.
- regulations , which reassures most investors.
- volume of liquidity on major platforms such as Binance or Bybit.
Pax Gold serves as a benchmark for tokenized gold , particularly because it offers direct conversions between the token and physical bars. If you hold enough for a full bar, you can withdraw it as physical gold transparent and verified intermediary
Tether Gold (XAUT)
Issued by Tether Limited, Tether Gold also holds a prominent position. The company is renowned for its USDT stablecoin , and XAUT follows the same model. Each gold token corresponds to one ounce of gold held in secure vaults.
- It can be used as collateral in DeFi (on Uniswap , Curve, etc.).
- Trading volume of approximately a few million dollars per day, less than Pax Gold, but still comfortable for liquidity .
- Buyback of physical gold subject to a fee of approximately 0.25%, under certain conditions.
Unlike Pax Gold, Tether operates from a more flexible jurisdiction. This allows it to be more permissive regarding DeFi uses, but also implies less clarity on regulations . Everything therefore depends on your level of audit and compliance requirements.
Comtech Gold (CGO ): A gold-backed solution in the MENA region
Comtech Gold (CGO) is a digital token backed by physical gold, primarily targeting the Gulf and Middle Eastern markets. Each token represents one gram of 24-karat gold, stored in secure vaults in Dubai. The project is Sharia-compliant, which may meet the specific requirements of certain investors in the region.
XDC Blockchain: Fast Processing and Low Gas Costs.
The project is based on the XDC blockchain , known for its fast transactions and minimal fees. The daily volume is around $600,000.
Accessible internationally, CGO offers exposure to gold while remaining aligned with Islamic finance standards. Regular audits and transparency regarding compliance are highlighted as additional elements of credibility, particularly for investors based in the MENA region.
More information about the rewards can be found here.
How a Gold-Backed Cryptocurrency Works
A gold-backed cryptocurrency functions like a collateralized stablecoin , meaning that each unit issued on the blockchain represents an exact quantity of physical gold , usually stored in certified and secure vaults. This mechanism relies on a 1:1 backing ratio (1 token = 1 gram or 1 ounce of gold).
Gold Tokenization
Tokenization involves creating a digital token (often on Ethereum - defined fraction of physical gold . The token acts as a digital version of a certificate of ownership for the gold. The user therefore does not physically possess the gold, but rather holds a representative right to it, certified by a centralized issuer.
For example :
- 1 PAXG = 1 troy ounce of gold London Good Delivery
- 1 XAUT = 1 ounce of gold stored in Switzerland
- 1 CGO = 1 gram of 24-carat gold stored in Dubai
Can a token be exchanged for physical gold?
Yes, in most cases, it is theoretically possible to exchange these tokens for physical gold . However, this depends on the issuer, the amount held, and your status (individual or institutional). Here's an overview:
- Pax Gold (PAXG) allows any investor—including individuals—to request a redemption in physical gold bars through Paxos, provided they have the minimum required quantity (e.g., 400 ounces for a full bar). Logistics fees apply, and the process is handled through Paxos Trust in the United States.
- Tether Gold (XAUT) also offers exchange for physical gold, but only in specific Swiss vaults. The service enhanced KYC requirements and is primarily aimed at clients with significant sums of money.
- Comtech Gold (CGO) facilitates gold conversions through DMCC-approved partners in Dubai. Access is available to individuals, but often within a regional framework (MENA zone) and with specific conditions.
In everyday practice, these physical conversions remain uncommon. This is not the primary use of gold-backed cryptocurrencies . What gives the token its value is primarily the trust that the backing is real and verifiable , not the actual intention to claim the physical gold.
The Proof of the Reserves
To maintain this confidence, issuers must provide proof of reserves . This involves:
- Regular audits, often monthly, carried out by independent firms (e.g., Withum for PAXG).
- The public publication of the number of tokens issued and the corresponding gold stock.
- Sometimes, decentralized oracles like Chainlink to ensure real-time transparency.
Without these guarantees, the token's value could be called into question. This is why the verifiability of the backing is a fundamental criterion for investors.
More information about the rewards can be found here.
How is the price maintained?
The price of a gold-backed token is maintained through an arbitrage between the price of gold on traditional markets and the price of the token on crypto platforms.
Here's how it works:
- If the price of the token on exchanges is lower than that of gold, arbitrageurs can buy it, convert it into physical gold or resell it on traditional markets.
- If the price of the token is higher than that of gold, holders can sell their tokens on the crypto market to realize an immediate profit, which rebalances prices.
This interplay of forces between buying, selling, and conversion naturally maintains parity with spot gold . It's exactly the same principle as for a dollar-backed stablecoin , except that the reserve asset here is a precious metal.
How to Invest Practically in a Gold-Backed Crypto?
The process is quite simple, even for a novice:
- Choose a reliable platform such as Binance, Bybit or another exchange supporting these tokens.
- Create and validate your account via the KYCprocedure.
- Deposit funds (fiat or crypto) to purchase the gold-backed token .
- Optionally, withdraw the tokens to a wallet for added security .
One crucial point: always check liquidity . The most popular gold-backed cryptocurrencies Pax Gold and Tether Gold , generally have fuller order books, and therefore less slippage .
What returns can be expected from a gold-backed crypto?
Unlike volatile cryptocurrencies like Bitcoin, gold-backed stablecoin primarily aim for stability and protection against crises. Their returns are essentially based on the price fluctuations of gold.
However, DeFi offers some opportunities:
- Provide liquidity by pairing your gold token with a volatile token.
- Generate a certain APY (often between 1% and 5%), depending on the pools.
- Lending the gold-backed token on specialized platforms.
Keep in mind that if the gold market gold-backed crypto will automatically increase in value. Conversely, if the precious metal falls, you will mechanically experience the same correction.
Points to be aware of for a gold-backed cryptocurrency
The risks inherent in these alternative investments should not be overlooked:
- Regulation : Some jurisdictions are more permissive, resulting in fewer guarantees for the investor.
- Audit : Ensure that the issuer performs a proof of reserves published by a recognized external firm.
- Crypto wallet : Remember to secure your private keys . A hack often results in the permanent loss of your tokens .
- Issuer : Check the reputation and financial strength of the company that manages the gold-backed crypto .
Finally, remember that gold tokenization is still a young sector. Hence the need to thoroughly research the platforms and the surrounding legal environment.
FAQ about Gold-Backed Crypto
Is it really backed 1:1?
If the issuer strictly adheres to the proof-of-reserves , then yes. According to Paxos audits, for example, each PAXG corresponds to a precise ounce of physical gold. Other providers also offer a 1:1 ratio, but make sure they publish evidence through reputable auditing firms.
Can you exchange your digital gold for physical metal?
In the case of Pax Gold, yes, under certain conditions (sufficient quantity and payment of logistics fees). For Tether Gold , a buyback is also possible, but also involves a fairly high minimum purchase and specific fees.
What about childcare costs?
One of the major advantages of tokenized gold lies in the absence of direct custody fees for the individual investor. However, the issuer bears these costs and incorporates them into its overall fee structure.
When is the best time to buy?
asset allocation strategy and your approach to diversification . Some prefer to buy at dips in the precious metals market , while others spread their entries over time to reduce risk .
Conclusion on a gold-backed cryptocurrency
Gold-backed cryptocurrencies are revolutionizing the way people invest in the precious metal. They offer the ease of a gold-backed stablecoin , the robustness of physical gold , and the global accessibility of blockchain . With Pax Gold , Tether Gold , and Comtech Gold , you have several options to enhance your portfolio diversification .
However, remain aware of the need for transparency from issuers, and take the time to assess regulations and audits . With a gold token , you benefit from potential protection against inflation, strong security via blockchain , and the ease of managing a simple crypto wallet . Provided you select a trustworthy provider, gold-backed crypto diversification solution within your overall alternative investment .
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Yoann
Trained as an engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future, I am participating in its democratization by developing Crypternon.