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.
To go into more depth, gold or silver-backed crypto regulates its worth by having a direct, stable link with a trusted asset – gold – thus avoiding what many risk-averse experts see as one of crypto’s shortcomings – its lack of intrinsic value, which results in high price volatility. Stablecoins (cryptocurrencies whose value is tied to outside assets) that use these physical assets can therefore enjoy more tangibility and more predictable price swings, compared to their fully digital counterparts.
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.
Throughout this, gold remained as valuable in the eyes of traders as it always had been. Investors kept investing in gold, and as a more stable option than many global currencies, it’s now a sought-after asset for the astute.
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.
By digitising the timeless value of gold into a spendable currency, Kinesis worked on our blueprint to integrate the stability of precious metals with the convenience of modern finance.
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
As mentioned, a legitimate gold-backed cryptocurrency enjoys a higher level of market stability than its more volatile counterparts. This is because it’s intrinsically linked to the current gold price, which is largely one of the most stable markets around. Historically, everyone wants precious metals, and so a coin linked to those metals is bound to retain its value as long as it’s associated with these materials.
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
By tokenising gold and silver into digital assets, holders can access blockchain trading platforms and all of their associated benefits with a tangible asset value behind them. These platforms offer easy trading, strict security credentials and the transparency of the blockchain as well as their safety regulations.
It avoids central bankers and, thus, banks
Through the blockchain trading methods mentioned above, investors can transfer value without having to go to a bank. This is beneficial in various ways: it’s faster, it’s more accessible, and it allows you to avoid the fluctuations that can happen when you trade money globally. In short, it’s a good way to beat a bad exchange rate.
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.
Another stumbling block is what’s known as Gresham’s law – bad money drives out good money. In practice, this means that people hold onto their gold and silver (good money) and spend paper fiat (bad money), despite their remarkably increased liquidity (and thus, spendability) obtained in the process of digitalisation.
Kinesis Yield on digitalised gold and silver
Kinesis solves both these problems. By presenting a passive Holder’s yield on digitalised gold and silver, Kinesis allows its users to earn money, simply by holding their assets.
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
In the wake of the 50th anniversary of the Bretton Woods Agreement collapse (which ended the role of gold as a unified fixed exchange rate dollar-stabilising mechanism), the necessity of re-visiting the policy of a store of value as a currency price determinant appears more self-evident than ever.
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.
Society seems to be craving the financial stability that gold-backed currency can unquestionably deliver. As The New Case for Gold book author, Jim Rickards explains, while sharing his insight on what a new Bretton Woods System would look like, the solution is already here.
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.
If you’re convinced by the many benefits of this stablecoin and want to start trading in gold-backed crypto, you should know that it offers more than just a reliable asset. With a rising market cap and surging demand since the beginning of 2020, it’s increasingly looking like the go-to option to combine convenience and stability in the blockchain world.