The Ultimate Guide to Gold-Backed Cryptocurrency

What is gold-backed crypto?

In its simplest form, a cryptocurrency backed by gold or silver is the modern evolution of the gold standard: that is, a monetary system where a currency is directly linked to physical precious metal. Coins or tokens issued that follow this system provide token holders with digital assets that have a value directly correlated to the physical assets they represent; gold or silver.

As a result, their price will never drop below the price of a precious metal that backs them, though the value of the token can increase in tandem with the underlying physical asset, providing both stability and the potential for profit.

The history of money backed by gold

To fully understand the benefits of gold-backed currency, it’s important to understand the idea behind linking currencies to precious metals and how it played out historically. First introduced by the United Kingdom in 1861, fixed-rate gold-backed currency came about to help stabilise an economy that was gradually becoming more and more global. Gold has always been an important resource for central banks and governments to hold, so tying a nation’s currency to its gold reserves was a way of ensuring that trade was always at a surplus. 

The United States followed suit in 1879, and until 1933 the US dollar was backed by gold. Why did this change? In part, following the First World War and the Great Depression in the 1930s, people began to hoard gold supplies. Governments also realised that it was difficult to aggregate resources based only on their reserves, so the system was changed to the current trust-based system that we see globally today. As a result, currencies were decoupled from gold and silver, and the value began to fluctuate more wildly as it was based on intangible promises, not unlike today’s modern cryptocurrency. 

Translating the gold standard into the modern day

Though the US dropped the gold standard fully in 1971, the idea behind linking money to something that’s truly valuable remains a solid financial strategy. With blockchain technology connecting commerce like never before, it was only a matter of time before cryptocurrency enthusiasts linked this new fintech revolution with a stable, trusted asset. 

This gives holders all the reliable store of value offered by gold, and all the ease of use you expect from a more modern, fluid asset. 

What is the benefit of currency backed by gold? 

The benefits of gold-backed crypto are numerous and are largely linked to its stability compared to other options like Bitcoin or the Ethereum blockchain. We’ve listed a few of the most commonly cited benefits below:

It’s a stable option

It’s easier to understand the market

Tied to this stability, the price fluctuations of gold-backed crypto as a whole, are easier to understand. Many of the market variations of Bitcoin and other crypto tokens can seem random, even arbitrary. However, with these stablecoins, you can look at the daily gold market and see trends, changes and predictions that will help to make informed investment decisions.

Cryptocurrency is easy to store

Unless you have a Swiss vault (or several) to hand, it’s not easy to store large volumes of gold on an individual level. Digitalised gold and silver allows investors to take advantage of its value for trading, investing and spending without worrying about its physical location at all times. This can translate to lower fees for using it as a trading asset, leading to greater convenience and profit.

You can access blockchain trading apps

It avoids central bankers and, thus, banks

All that glitters is not gold…  The drawbacks of gold-backed crypto

There are, however, aspects of some gold-backed crypto that still show room for improvement.

Although digitalised precious metals are, by default, superior when compared to fiat or traditional physical bullion assets, in most cases they do not offer anything beyond a combination of what crypto or precious metals are offering already.

Lack of yield

Traditionally, the lack of yield and therefore limited earning opportunities on the vast majority of gold-backed crypto, result in other assets, like stocks paying dividends, bonds or rental properties, appearing as a more attractive prospect for investors. 

Nowadays, we can see an increase in the public awareness of the inflationary risks associated with long-term capital holding, which means that investors will look even more consciously for the assets with the highest earnings potential. As negative interest rates have become normalised, people are scouring for a solution that will not require them to – counterintuitively – spend extra money in order to keep their money stored with a bank.

Gresham’s Law

Kinesis Yield on digitalised gold and silver

The Kinesis Yield system not only takes gold-backed crypto a leap further, but simultaneously stimulates the organic growth of a monetary system in which its users are rewarded for their participation, not penalised. 

Moreover, a yield on gold and silver, which can be earned by holding, sending or trading, incentivises spending and defeats Gresham’s Law as a consequence. 

Back to the Gold Standard

This necessity, coupled with global digitalisation, is already enabling us to bring back gold and silver as money, once again. Putting gold on the blockchain, a kind of 21st-century alchemy, transmutes it into a spendable asset, with the potential of broadening its reach across the globe.

A gold-backed currency, with underlying gold securely stored in a vault and available to spend at the tap of a button, is already available through the Kinesis Monetary System.

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