Gold And Cryptocurrency: How Do Gold-Backed Stablecoins And Tokens Work?

Gold and cryptocurrency: how do gold-backed stablecoins and tokens work? Gold or Cryptos? The debate is almost as old as Bitcoin is. For the time being, Bitcoin has failed in its ambition to become “digital gold”, in other words, a store of value. Its excessive volatility, often with sessions at +/-10%, deters many investors from giving it a prominent place in their portfolios. The solution? Gold-backed stablecoins.

How do gold-backed stablecoins work?

The creation of stablecoins guaranteed by gold starts from two observations: What would happen if a token could replicate the price of gold, adding all the advantages of the blockchain? What if the average investor could hold gold indirectly, without having to worry about custody issues?

In the wake of stablecoins backed by fiat and government bonds, stablecoins backed by physical reserves of monetary gold have therefore been created.

We are talking here about the tokenization of gold: gold reserves, physical and exchangeable, are digitized on a blockchain. In the majority of cases, the value ratio is 1:1, i.e. 1 token issued = 1 ounce of gold. The gold in question is stored in the vaults of an approved financial institution such as Brink's or JP Morgan.

The ratio can obviously vary, being 1 token = 1 gram of gold (1 ounce = 31.1 grams). Each token, therefore, represents 1 gram, cast in a 400-ounce monetary ingot .

The holders of these gold-stablecoins are the owners of the backed physical gold. They can thus at any time request the exchange of their tokens against the yellow metal. This is the same regulatory mechanism that guarantees the ability for fiat-stablecoins to be exchanged for their dollar equivalent.

Should we invest in a stablecoin-Gold? What are the risks?

The first data that could encourage Gold and Bitcoin to coexist is the relative strength index GOLD/BTC. This is extremely interesting because it allows you to assess whether Gold outperforms BTC.

It just so happens that the trajectory of the GOLD/BTC pair has been trending upwards since November 2021. The chart below shows this, along with a visual indication of volatility (Donchian Channel).

PAXG/BTC in Day View – TradingView

Advantages of tokens & stablecoins pegged to gold:

• Gold is a proven safe haven, and a token allows you to physically hold it without having to store it.

• Gold is less volatile than Bitcoin, and its price action is less complex to read.

• A token replicating gold is a means of exposing yourself in fractions to the commodity market.

However, beware of a few drawbacks:

• Gold is not a yield value, and over the medium term, its performance is in no way comparable to that of BTC and ETH.

• Some stablecoins impose a minimum, Tether's XAU₮ for example imposing a minimum of 50 XAUT on purchase, or nearly $86,000 at the current price.

PAXG and XAU₮: the two biggest gold-backed stablecoins

Now that you have a better understanding of how these crypto-assets work, let's take a look at two of the most important ones in the market.

Pax Gold (PAXG)

PAXG has built its success on the credibility of its collateral: for every Pax Gold in circulation, there is an ounce of gold stored in Brink's vaults.

Reserves are monitored monthly by the NYDFS, which is not known to give giveaways to financial intermediaries.

The PAXG was designed on the Ethereum blockchain, as an ERC-20 token. Each holder of a token has the possibility of consulting the serial number, the weight, and the purity of the associated ounce of gold.

Key information

• Ratio: 1 PAXG = 1 ounce
• Place of conservation: Brink's (New York)
• Auditor: New York State Department of Financial Services (NYDFS)
• Blockchain: Ethereum (ERC-20)
• Capitalization: 556 million USD (n°70)
• Supply in circulation: 326,423.98 PAXG

Tether Gold (XAU₮)

If Tether Gold is not number 1, it may owe it to the minimum investment imposed: it is indeed necessary to put in no less than 86,000 dollars, or 50 XAUT. Not practical when you want to bet a limited amount.

It is the favorite token of seasoned traders: FTX has created versions of XAUT with x3 leverage, called XAUTBULL (XAUT with x3 leverage in long position) and XAUTBEAR (in short position).

Key information

• Ratio: 1 XAUT = 1 ounce
• Place of conservation: Switzerland
• Auditor: New York State Department of Financial Services (NYDFS)
• Blockchain: Ethereum (ERC-20), Tron (TRC-20)
• Capitalization: 422 million USD (n°215)
• Circulating Supply: XAU₮246,524.00

Owning physical gold is not the most convenient of investments. Storage, security, tax declaration... the concerns abound. The blockchain eliminates most of these hassles. Now you just have to focus on the analysis. Because if Gold is less volatile than Bitcoin and Ethereum, it is still a risky asset.