What exactly is the purpose of cryptocurrency backed by gold? You might have asked yourself this at some stage, especially during the crypto bull market of last year (2017). A time when many secretly hoped that cryptos would completely leave gold behind to once and for all prove that gold is after all just a “barbarous relic.”
It was unpopular at the time to even bring up gold backed crypto currency in conversation. It should after all be no secret that more than one former “gold bug” who got badly burned by the blatant manipulation of the gold price via naked paper – not backed by physical gold or standing for physical gold backed delivery, dipped their toes in the cryptocurrency market in the search for some form of relief. And relief did come for many – at least for a short moment in time, given the larger scale of things.
This was before the crypto bear raised its head and started to rip into the crypto bull as if there is no hope and no tomorrow. The ‘sky was falling’ like so many times before in the crypto market – a phenomena that is pretty “normal” in this market. Yet, despite the latter, many got badly burned, especially those who went all into crypto and then sold the proverbial house for pennies on the dollar.
Fast forward to today, it seems that gold backed cryptocurrency along with other stablecoins are enjoying much more publicity than what was previously the case – and definitely deserve a second look.
Why gold? What is the purpose of gold today?
Given blatant gold market manipulation, it is probably hard to imagine, but gold has stood the test of time for thousands of years as a store of value – a preserver of purchasing power. Today, like for most part of the last 2000 years or so, 1 gram of gold can still buy about 10 loaves of bread.
In the modern age probably more loaves of bread as the ancients didn’t mess about when it came to the weight of bread. It should also be kept in mind that not all loafs of bread are created equal or selling at the same prices. That being said, it doesn’t take away from gold’s role as a store of value – even today.
So why a gold backed cryptocurrency when you can simple buy and hold physical gold?
Yes, very little beats physical gold in hand, especially in terms of counterparty risk. So why would you need a gold backed cryptocurrency and expose yourself to that sort of risk?
The answer is so that you can transfer value from point A to B:
- Globally – Where there is an internet connection, value can be transferred.
- Without fluctuation.
- At a stable price relative to other assets – Due to market arbitrage.
- Fast – It is much faster to transfer value via the blockchain than by boat, car, plane, train or worse. This means transactions that normally take a great deal of time to execute can happen in mere seconds or a couple of minutes.
- Cost-effectively – Transactions can be done cost-effectively via the blockchain. Send the gold physically and you will pay a pretty penny in terms of delivery and insurance costs alone.
- Audit trail – Payment sent via the blockchain can easily be traced. No lost gold due to the mishandling or redirection of mail to the wrong address or any funny business.
- Smart contracts – Make conditional transactions possible. You can use a smart contract to guarantee that the terms of a contract will execute. Apart from the counterparty risk that a gold backed cryptocurrency might be naked and not actually backed by or redeemable for gold, you don’t have to worry about the credit rating of the person (or their credit risk), their counterparty risk (in terms of them running away with currency without fulfilling their end of the contract), their balance sheet, their name, their religion and what have you.
- Bankless – You can transfer value without having to go to a bank.
- And more!
Thus, a gold backed cryptocurrency definitely counts among the stablecoins that can be used to transfer value in the manner described above. Should you buy and hold gold backed cryptocurrency as a store of value long-term? Probably not as physical gold in hand carries zero counterparty risk. Yet, don’t underestimate the value of cryptocurrency backed by gold and silver.