If asked 5 years ago if youd rather have a Bitcoin or a single ounce of gold, you probably wouldnt bat an eyelid, unless it was a stunned reaction to the audacious question. Until two years ago, the notion that the value of Bitcoin would ever come close to that of gold was unimaginable.
Yet, in 2017, the price of Bitcoin finally caught up to the age-old unit of value and reached unit-for-unit parity with gold. Unsurprisingly, when this came to the attention of gold investors around the world, the trading game was spun on its head.
Increasingly, the concept of gold-backed cryptocurrencies has surged and paved the way for a new generation of altcoins and new, innovative methods of storing value. In combination with the need to tackle the inherent fractures within the crypto market, such as violent and unpredictable volatility, the new generation of stablecoins have come to serve a great purpose.
Stablecoins are designed to minimize the volatility of the price of the currency in the market. Pegged to a cryptocurrency, fiat money or another exchange-traded commodity, the stablecoin remains relatively stable with respect to the asset to which its pegged. And stablecoins do so in two main ways. Asset-backed stablecoins, such as Tether (USDT), value their currency against the value of fiat currencies or a precious commodity, like gold.
Image Source: CoinMarketCap
Algorithmic stablecoins such as Timvi (TMV), rely on computing logic to monitor the supply and demand of its currency to achieve stability.
Stablecoins are primarily pegged to the stable values of fiat currencies or precious commodities. In the case of a gold-backed cryptocurrency, one token should equate to one gram of gold. The price of the cryptocurrency wouldn't fall below the current price of gold, hence, price stability. The reserves of gold must be held by some third party and must be perfectly representative of the amount of stablecoins in circulation. When the gold reserves of the third party grow, new coins can be issued.
One of the most prominent stablecoins backed by exchange-traded commodities, Digix Gold Token (DGX), is backed by physical gold bullion, with 1 DGX equating to 1 gram of 99.99% LBMA (London Bullion Market Association) standard gold. Reserves are kept in a custodial vault in Singapore and users can redeem their gold by mail or pick it personally.
The traditional financial economy abandoned the gold standard in 1944 following the Bretton Woods Agreement. The gold standard restricted the ability of governments to use monetary policies such as quantitative easing to ease adverse conditions. The core values of the crypto market are based on the premise of non-intervention, meaning that the restricted ability of governments to intervene is a nonfactor in the crypto exchange.
There have been some eyebrows raised regarding the logistics of having a mainstream cryptocurrency pegged to gold. Bitcoin's growing market cap of $146 billion (CoinMarketCap) is indeed immense compared to most companies but this pales in comparison to gold.
Image Source: CoinMarketCap
As of now, there are an estimated 190,040 metric tons of gold above ground and 54,000 metric tons in known reserves underground that can be mined.
So, todays rate of $1,485 per ounce of gold means that theres approximately $12.8 trillion worth of gold in the world. If a small portion of global gold reserves were to be replaced with Bitcoin, its value would continue to grow and prices would be kept at a minimum of the price of gold.
Image Source: BullionByPost
Gold-based cryptocurrencies have some distinct advantages. Some have even gone as far as to say that they should replace gold itself, as a store of value. The amount of gold in the world is limited to the amount that can be mined. Likewise, the supply of Bitcoin maxes out at 21 million coins.
Gold is relatively portable since it can be melted and divided into smaller units. It can also be verified and is transportable given that the weight of an ounce of gold is equivalent to a slice of bread. But Bitcoin is cryptographically secured and controlled by a private key and they can be divided infinitely. I believe these features make cryptocurrencies more attractive than gold as a store of value.
The main reason for restoring a gold standard in a cryptocurrency exchange is to create a baseline or minimum value of the coin or token that will always be equivalent to that of gold. It places no limitations on prospects for growth as the price of the coin can exceed the value of gold.
Gold-pegged digital currencies offer protection from sharp dips, stabilize the market and encourage investment. The math adds up and gold would appear to be the most appropriate commodity to back a stablecoin.
No financial investment is free from mishaps, and cryptocurrencies pegged to gold are no different. While the blockchain is a highly secure means of tracking digital transactions, there are still tangible risks. This valuation system introduces concerns over storing large supplies of physical gold. If said gold were to disappear or be stolen, so too would the value of the coin.
Equities Contributor: Oleg Spilka
Source: Equities News
DISCLOSURE:The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.
See the rest here:
24-Carat Cryptocurrency: Returning to the Gold Standard - Equities.com
- What Is a Cryptocurrency? We Need Clearer Definitions - Coindesk - January 5th, 2020
- Cryptocurrency Will Not Die: Mainstream Media on Bitcoin in 2019 - Cointelegraph - January 5th, 2020
- South Korea Works to Bring Cryptocurrency Into the Mainstream - The Diplomat - January 5th, 2020
- Chinas Dichotomy Between Cryptocurrency And Blockchain - Forbes - January 5th, 2020
- Google lifts ban on Ethereum wallet app it thought was mining cryptocurrency - TNW - January 5th, 2020
- Why a Technical Analyst Believes Bitcoin Cash (BCH) Will Surge by 80% - newsBTC - January 5th, 2020
- Forget Brexit, Think Blockchain and Cryptocurrency - FXStreet - January 5th, 2020
- Why Analysts Are Bullish On Cryptocurrency As Bitcoin Turns 11 - Ethereum World News - January 5th, 2020
- 7 Big Bitcoin and Cryptocurrency Predictions for 2020 - The Daily Hodl - January 5th, 2020
- Top Analyst Brands XRP a Moonshot Investment; Heres Why - Ethereum World News - January 5th, 2020
- Ian Balina, The Controversial Face Of Cryptocurrency - Nasdaq - January 5th, 2020
- Cryptocurrency in Arab World: Clock is Ticking, But Pace is Slow - Finance Magnates - January 5th, 2020
- Is Cryptocurrency Inheritable? Yes, Here is How it Works - Bitcoin & Crypto Guide - Altcoin Buzz - January 5th, 2020
- Upbits Stolen Ethereum Is Moving, and Its Bad News for ETH - newsBTC - January 5th, 2020
- Bitcoin Hash Rate 8x Higher Now Than At $20,000 Top; Why Its Bullish - Ethereum World News - January 5th, 2020
- U.S. Authorities Arrest Virgil Griffith For Teaching Cryptocurrency And Blockchain - Forbes - November 30th, 2019
- What Hides Behind South Korean Cryptocurrency Regulation Policy? - The Diplomat - November 30th, 2019
- Thailand: Cryptocurrency Law Will Change in 2020 to Stay Competitive - Cointelegraph - November 30th, 2019
- The Cryptocurrency Market Update: Bitcoin back on recovery track, Ripple and Ethereum follow the lead - FXStreet - November 30th, 2019
- CipherTrace Q3 2019 Cryptocurrency AML Report: 2/3 of the Top 120 - AiThority - November 30th, 2019
- XRP and Ripple Name-Dropped on BBC Segment on Cryptocurrency - Ethereum World News - November 30th, 2019
- Cryptocurrency Crime Spikes This Year and SMBs are Paying the Price - Commercial Integrator - November 30th, 2019
- This Cryptocurrency Is Up 11310% in a Week. Legit Scam or Just Legit? - CCN.com - November 30th, 2019
- Akon has started building Akon City in Senegal with focus on cryptocurrency and renewable energy - Evening Standard - November 30th, 2019
- $150 Billion Cryptocurrency Boom Is Here Buy This ETF to Profit - Banyan Hill Publishing - November 30th, 2019
- Is a Cryptocurrency Derivatives Boom On Its Way? - Yahoo Finance - November 17th, 2019
- 2 men arrested in elaborate plot to steal $550K in cryptocurrency by hacking social media accounts - USA TODAY - November 17th, 2019
- This cryptocurrencys price just pumped 7,000%, but why? - Decrypt - November 17th, 2019
- The cryptocurrency market update: Bitcoin and major altcoins pass the time in ranges - FXStreet - November 17th, 2019
- Crypto-corruption In 2018, a major Russian cryptocurrency exchange lost $450 million in Bitcoin. Now, the exchange's founder is saying he transferred... - November 17th, 2019
- Big Canadian bank rumored to offer cryptocurrency accounts, Bitcoin trading - The Next Web - November 17th, 2019
- Switzerland gets another Bitcoin bank that holds cryptocurrency for customers - The Next Web - November 17th, 2019
- Banning Cryptocurrency Is Not On Indian Parliaments Winter Session Agenda - Inc42 Media - November 17th, 2019
- What Could Trigger the Next Cryptocurrency Alt Season? - Dash News - November 17th, 2019
- U.S. cant let criminals get the upper hand by using Chinas coming cryptocurrency - MarketWatch - November 17th, 2019
- China planning to reward its soldiers with cryptocurrency - FXStreet - November 17th, 2019
- Creativity and Value Will Win the Cryptocurrency Exchange Wars - newsBTC - November 17th, 2019
- Cryptocurrency Exchange Bankruptcies Are the Failed ICOs of 2019 - BeInCrypto - November 17th, 2019
- Beware of cryptocurrency gurus like Dr Ruja and her OneCoin cult - Jim Duffy - The Scotsman - November 17th, 2019
- China to reward troops with cryptocurrency bonuses - Express - November 17th, 2019
- The cryptocurrency market update: Bitcoin and major altcoins are vulnerable to further losses - FXStreet - November 17th, 2019
- Helium is building a peer-to-peer internet-of-things network - Fast Company - November 17th, 2019
- Coinbase Announces its Upcoming Cryptocurrency IRA - The Merkle Hash - November 17th, 2019
- Three Classic Coins That Attempt To Preserve Existing Cryptocurrency Features - Bitrates - November 17th, 2019
- Cryptocurrency tracking improves -- but how? - FCW.com - November 9th, 2019
- Senator Romney Considers Action As A Nation On Cryptocurrency Threat To Homeland Security - Forbes - November 9th, 2019
- Why Is the Stellar Lumen Cryptocurrency Up 18% Today? - Motley Fool - November 9th, 2019
- Cryptocurrency This Week: Facebooks Marcus Terms Bitcoin Not A Currency; Regulation A Must, ... - Inc42 Media - November 9th, 2019
- Vancouver-based cryptocurrency exchange latest to shutter with millions owing to clients - Vancouver Sun - November 9th, 2019
- Governments race to beat Facebook's cryptocurrency, libra, at its own game: Don Pittis - CBC.ca - November 9th, 2019
- Cryptocurrency for Africa: Akon Reveals When He's Going to Launch His Own Coin - U.Today - November 9th, 2019
- Swell the News? XRP Drops 5% as Ripples Flagship Event Kicks Off - Cointelegraph - November 9th, 2019
- Why Are Cryptocurrencies Becoming a Mainstay of International Business Platforms? - CryptoNewsZ - November 9th, 2019
- Startup Targets Cryptocurrency Crime - But Will The Big Banks Come On Board? - Forbes - October 24th, 2019
- Major Bitcoin Miner Warns The Cryptocurrency Needs Better Privacy - Forbes - October 24th, 2019
- Why Cryptocurrency is in The Spotlight For More Central Banks - newsBTC - October 24th, 2019
- Cryptocurrency Mining Hardware Market 2019-2023 | Evolving Opportunities with Advanced Micro Devices, Inc and Baikal Miner | Technavio - Business Wire - October 24th, 2019
- Bank of Canada Warms To National Cryptocurrency, Will it Compete Against Bitcoin? - newsBTC - October 24th, 2019
- Facebook's Cryptocurrency Libra Could Threaten Alipay and WeChat Pay, Tencent Says - CryptoGlobe - October 24th, 2019
- Are Smart Cities The Pathway To Blockchain And Cryptocurrency Adoption? - Forbes - October 24th, 2019
- Where US Regulators Stand on Cryptocurrency - Bitcoin News - October 24th, 2019
- Europol: Bitcoin is the principal cryptocurrency used in the dark web - FXStreet - October 17th, 2019
- SEC puts a stop to Telegram's cryptocurrency plans in the US - Engadget - October 17th, 2019
- Alert: IRS Releases Long-Awaited Guidance on Taxation of Cryptocurrency Transactions - JD Supra - October 17th, 2019
- Chinas Global Cryptocurrency May Be on the Horizon - ETF Trends - October 17th, 2019
- As Facebook's libra faces headwinds, China is racing to launch its own global cryptocurrency - CNBC - October 16th, 2019
- Mastering Emotions and Managing Risk in Cryptocurrency Trading - Coindesk - October 16th, 2019
- Telegram might be forced to put its global cryptocurrency plans on ice - MIT Technology Review - October 16th, 2019
- Bitcoin Will Break Out Again in November, Suggests Cryptocurrency Trader - BeInCrypto - October 16th, 2019
- Theres A New Question On Your 1040 As IRS Gets Serious About Cryptocurrency - Forbes - October 16th, 2019
- An overview of Facebooks cryptocurrency supporters whos in and whos out - The Next Web - October 16th, 2019
- Cryptocurrency market update: Bulls swinging into action, Bitcoin, Ripple and Ethereum in the green - FXStreet - October 16th, 2019
- Another partner abandons Facebooks cryptocurrency - Marketplace.org - October 16th, 2019
- The New Guidance on Cryptocurrency - Accountingweb.com - October 16th, 2019
- The issuer of a star cryptocurrency is being sued for $1.4trn - The Economist - October 16th, 2019
- Casbaneiro is a threat to cryptocurrency in Latin America - Yahoo Finance - October 16th, 2019
- CipherTrace report: 87% of cryptocurrency trading is now traceable - FXStreet - October 16th, 2019
- Facebooks Blockchain-Based Cryptocurrency Libra: Everything You Need To Know - Forbes - October 8th, 2019
- Cryptocurrency: What to know about digital money - Fox Business - October 8th, 2019
- India must note that bitcoin is much more than a cryptocurrency - Quartz India - October 8th, 2019