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.
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