What is gold-backed crypto?
A cryptocurrency backed by gold or silver is the modern evolution of the gold standard. This is a monetary system where a currency is directly linked to physical precious metals.
Digital coins or tokens issued via this system have a value directly correlated to the physical assets they’re linked to i.e. gold or silver. This gives these cryptocurrencies extra stability compared to other digital assets, which lack intrinsic value and have high price volatility.
It also means their price will never drop below that of the precious metal that backs them. This greater price predictability means they’re sometimes referred to as stablecoins.
The history of money backed by gold
To fully understand the benefits of gold-backed currency, it’s helpful to look at its history. First introduced by the United Kingdom in 1861, fixed-rate gold-backed currency was invented to help stabilize an economy during increased globalization.
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.
This changed after people began hoarding gold supplies after the First World War and the Great Depression in the 1930s. Governments also realized that it was difficult to aggregate resources based only on their physical reserves.
Because of this, currencies were decoupled from gold and silver, and the system was changed to the current trust-based one used today.
Despite this, gold has remained as valuable in the eyes of traders as it always had been. Investors kept investing in gold. As a more stable option than many global currencies, it’s still a sought-after asset.
Translating the gold standard into the modern day
Though the US dropped the gold standard in 1971, linking money to a valuable physical asset remains a solid financial strategy. Cryptocurrency backed by gold can be viewed as a modern interpretation of the gold standard.
As Rupert Rowling, a Market Analyst for Kinesis, states:
“The gold standard was a monetary system where the value of a country’s currency was directly linked to the amount of gold holdings it possessed.
“The gold standard made for easy currency exchanges as the rates were pegged back to the underlying gold supporting the individual currencies.”
In the wake of the 50th anniversary of the Bretton Woods Agreement collapse, revisiting the idea of using a store of value as a currency price determinant appears more self-evident than ever.
Latifa Alkhanjary, Kinesis’ In-house Journalist, explains:
“Despite the eradication of the gold standard in 1971, it is clear that the enduring value of this precious metal persists today.
“As central banks follow suit with digital currencies set to represent fiat, the direction towards digital rather than paper money is already well underway.”
The return to gold and silver is further encouraged by global digitalization. Putting gold on the blockchain turns it into an asset that’s spendable worldwide.
This means investors can benefit from both the stability of a gold standard system with the convenience and opportunities of the blockchain.
By transforming gold into a digital currency, Kinesis created a blueprint for integrating the stability of precious metals with the convenience of modern finance.
Our gold-backed crypto gives holders the reliable store of value of precious metals with the ease of use expected from a more modern, fluid asset.
The value of gold in 2022 and beyond
When considering investing in gold-backed cryptocurrency, it’s important to look at the value of precious metals in recent times.
In February 2022, gold prices increased to near-record levels exceeding $2,000 per ounce. That was when Russia invaded Ukraine, creating a pessimistic market. However, by September 2022, the value had dropped by more than 20%.
Towards the end of 2022 and the beginning of 2023, there was a trend reversal of gold as it endured a series of highs and lows. Its value rose by 14% from November 2022 to February 2023, when China’s economy rebooted, and the demand for gold increased.
In late February 2023, the value of gold exceeded the $2,000 per ounce mark again. Due to the banking turmoil caused by the Silicon Valley Bank collapse, investors sought out safe-haven assets, such as gold.
Ultimately, investors can get excited by increases in the value of the precious metal. The higher the value of gold, the stronger and more stable gold-backed cryptocurrency is.
Navigating gold-backed crypto in 2023
Historically, gold has been viewed as a safe investment because it is usually stored in secure vaults and has very low price volatility. Gold is also not linked with other asset classes, so it is less susceptible to the whims of the market during times of economic uncertainty.
These attributes have made gold-backed cryptocurrencies an incredibly attractive investment option in recent years.
In April 2023, Texas legislators announced a proposal to launch a gold-backed digital currency.
Gold-backed cryptocurrency has continued to make headlines in 2023. Like any market, the current geopolitical landscape has had an influence. It was reported in January 2023 that Russia and Iran are working together to launch a gold-backed cryptocurrency. The idea of this coin is to replace the US dollar for international trade payments.
The US dollar remains the leading currency for trade and foreign reserves. But Russia and Iran, alongside BRICS (Brazil, Russia, India, China, and South Africa) nations, have accelerated their efforts to “de-dollarize” international trade.
In July 2023, the Russian state-controlled TV network RT confirmed that BRICS plans to introduce a new gold-backed currency. It is expected that some central banks will diversify away from the dollar as geopolitical tensions increase and new opportunities arise in emerging markets.
What is the benefit of currency backed by gold?
There are numerous benefits of crypto backed by gold. These are largely linked to its stability compared to other options like Bitcoin or the Ethereum blockchain. We’ve listed a few of the advantages below.
1. It’s a stable option
A legitimate gold-backed digital currency 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 them is bound to retain its value.
2. 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 stablecoins, you can look at the daily gold market and see trends, changes, and predictions that will help to make informed investment decisions.
3. Cryptocurrency is easy to store
Unless you have a Swiss vault (or several) to hand, it’s not easy for individuals to store large volumes of gold. Digitalised gold and silver allow investors to take advantage of the value of precious metals for trading, investing, and spending without worrying about storage.
This can translate to lower fees for using it as a trading asset, leading to greater convenience and profit.
4. You can access blockchain trading apps
By tokenizing gold and silver into digital assets, holders can access blockchain trading platforms and their benefits with a tangible asset value behind them.
These platforms offer easy trading, strict security credentials, and the transparency of the blockchain alongside their safety regulations.
5. It avoids central bankers and, thus, banks
Through blockchain trading methods, 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 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.
The drawbacks of gold-backed crypto
Digitalised precious metals are typically superior compared to fiat or traditional physical bullion assets. Though in most cases, they do not offer any benefits that are unique to what crypto or precious metals are already offering.
There are some disadvantages which need to be considered.
1. Lack of yield
There is a lack of yield and therefore limited earning opportunities on the vast majority of digital currency backed by gold. This results in other assets, like stocks, bonds, or rental properties, appearing as a more attractive prospect for investors.
Nowadays, there’s an increased public awareness of the inflationary risks associated with long-term capital holding. This means investors are consciously looking for assets with the highest earnings potential.
As negative interest rates have become normalized, people are scouring for a solution that won’t require spending extra to keep their money stored with a bank.
2. Gresham’s Law
Another stumbling block is what’s known as Gresham’s Law. This is that 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). This is despite the increased liquidity as a result of digitalization.
3. Regulation
Cryptocurrencies may be affected by tax laws and restrictions by governments and other jurisdictions.
Regulations change and evolve, so investors can expect some uncertainty. Rule makers may consider cryptocurrencies as securities, commodities or other assets, which may incur tax liabilities.
4. Cybersecurity risks
Gold heists are rare, so investors don’t need to worry about physical gold getting stolen or tampered with. However, there are cybersecurity risks to investing in cryptocurrency.
Investors should take caution to avoid fraudulent trading platforms. This could leave their accounts compromised or fall victim to hackers and phishing attacks.
5. Trust issues
As gold-backed crypto relies on the value of physical gold, there is a risk that gold may be stored in an unsafe location.
If the parties handling the physical gold are unreliable, the gold-backed cryptocurrency could be compromised. Also, if the gold reserves backing the cryptocurrency are not insured, any physical loss would directly affect investors.
Kinesis Yield on digitalised gold and silver
By putting 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 stimulates the organic growth of a monetary system where its users are rewarded, not penalized, for their participation.
Moreover, a yield on gold and silver, which can be earned by holding, sending, or trading, incentivizes spending and defeats the impact of Gresham’s Law.
The future of gold-backed cryptocurrency
As with any investment, it’s important to look toward the prospects and developments of gold-backed crypto. Throughout history, investors have treasured gold as a safe haven asset.
As global uncertainties continue and the market remains volatile, it’s expected that the demand for gold-backed crypto will increase.
This is, in part, due to greater accessibility. People from all over the world can invest in gold without the need for physical ownership in their specific location.
At Kinesis, we allow individuals to invest in small units of gold, which helps to break down the barriers of the gold market and enable more people to invest in gold.
Diversify your portfolio with Kinesis
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 the go-to option for a convenient and stable blockchain investment.
A gold-backed currency backed by securely stored precious metals and available to spend at the tap of a button is already available through the Kinesis Monetary System. Discover how you can make your money work for you with our gold-backed digital asset today.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The opinions expressed in this article, do not purport to reflect the official policy or position of Kinesis.
