Traditional cryptocurrencies like bitcoin have disappointed investors in some way. Their main problem was the lack of provision of physical assets and dependence on peer-to-peer Internet transactions. Since this money is purely virtual, critics doubt the ability of cryptocurrencies to become an alternative to fiat currencies. To solve this problem, the idea of a cryptocurrency backed by physical assets arose. The value of these cryptocurrencies is pegged to the value of physical assets such as real estate, oil, other commodities, minerals, and even precious metals such as gold.
However, we will focus on gold-backed cryptocurrencies. The value of these cryptocurrencies is pegged to the gold rate. That is, despite the fact that crypto-coins are in a distributed registry – this makes them easier to trade, they also have an intrinsic value (traditional cryptocurrencies do not have this property).
So, how did the gold-backed cryptocurrency come about? Linking the value of a digital coin to real, physical gold is not a new practice. The first digital currency backed by gold was launched in 1999 under the name “E-gold”. Its creator was Dang Jackson, who believed that E-Gold would be able to withstand the volatility of the markets (unlike paper currency), and therefore would be an ideal solution to the problems faced by the monetary system.
E-Gold has gained a lot of popularity and has been used by millions of people around the world. Privacy-conscious institutions such as Netizens have been impressed with its level of protection, using it to open anonymous accounts. The coin has also gained popularity among overseas merchants to transact internationally.
Unfortunately, E-Gold faced a number of issues that led to its disappearance, namely increased competition, a massive increase in traffic that caused transactions to be delayed, and an increase in cybercrime, all of which undermined the security of the coin.
Subsequently, several other attempts were made to create a gold-backed digital currency, but the craze proved to be short-lived. For example, in 2015, a new gold-backed cryptocurrency called “Xaurum” appeared, but it didn’t have much luck. It was only after bitcoin and blockchain became sufficiently popular that the idea of a gold-backed digital currency loomed on the horizon again.
Over the past few months, a plethora of gold-backed cryptocurrencies have emerged. Even state mints, such as the UK, now have their own “gold” cryptocurrencies.
How do cryptocurrencies backed by gold work?
Her idea is very simple and convincing. A digital token represents a certain amount of gold. For example, one coin of token “X” represents 1 gram of gold. The gold to which the token is linked is held by a trusted third party. Gold can be traded by other token holders.
The value of a token backed by gold, at a given point in time, will be equal to the prevailing gold rate. If the token is not in demand, then its price will still be equal to the gold rate. In the event of an increase in popularity, its price may exceed the rate of gold.
What makes gold-backed digital coins different from their predecessors?
The difference between a gold-backed cryptocurrency and other cryptocurrencies, apart from the presence of intrinsic value, is the amount of initial investment. Most investors who bought traditional cryptocurrencies were able to invest small amounts. However, for cryptocurrencies backed by gold, the minimum amount of investment corresponds to the amount of gold and, accordingly, its price.
Another difference between these two types of cryptocurrencies is their price fluctuations. While the prices of traditional digital coins like bitcoin and ethereum can rise and fall dramatically, gold-backed cryptocurrencies are more stable.
As we mentioned earlier, the value of cryptocurrencies backed by gold cannot fall below the value of gold. If such a coin is in demand, then its price can rise much higher than that of gold. However, if the cryptocurrency backed by gold is not popular, then the value will still remain at the level of the gold rate.