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What Are Gold-Backed Tokens? How Do They Work?

By May 2, 2023May 17th, 20234 minute read

Gold-backed tokens, backed by actual gold, resemble stablecoins in several ways. A digital token pegged to the current gold price has less volatility than other well-known tokens. Although fiat currency-backed tokens are popular among Crypto investors in this rapidly changing time, gold-backed tokens are also making an amazing place for themselves. When the price of Bitcoin and gold were correlated in 2017, the idea of gold-backed tokens was born. Let’s learn more about gold-backed tokens and their work in this article.

What is a gold-backed token?

A gold-backed token is a derivative digital asset whose value is guaranteed by the price of gold at the time it was created. Each gold-backed token defines that each token is equivalent to a certain weight or number of Troy ounces of gold.

This implies that there should be an equivalent quantity of gold in reserves or that there is a fault with the company or trusted custodian as physically collateralized assets. Even gold can be redeemed for some tokens. Unlike most Cryptos, they are anchored to a physical object, shielding it from extreme price fluctuations.

The top five leading gold-backed tokens are:

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  • Paxos Gold (PAXG);
  • Perth Mint Gold Token (PMGT);
  • Digix Global (DGX);
  • Tether Gold (xAUT);
  • Meld Gold by Algorand.

How does gold-backed token work?

The specific amount of physical gold that is backed by a certain Crypto is kept in gold reserves. Custodians, usually banks or other outside organizations, are in charge of holding these reserves. Depending on the token, the specific backing ratio can change. For example, a fraction of an ounce might be used to back some tokens, while others might be backed 1:1 (1 token to 1 gram of actual gold).

The primary advantage of purchasing a gold-backed token is its stability and security. Since it has been used as a currency for so long, gold’s value has generally remained constant. As a result, the value of a gold-backed token won’t decrease below the price of gold, making it a relatively secure investment. Additionally, the values of these Cryptos have been known to rise above the price of gold.

The majority of gold-backed tokens are Ethereum blockchain-based ERC-20 standard tokens. They are thus compatible with any wallet that accepts ERC-20 tokens. These tokens can also be sold on Crypto exchanges, much like other popular Cryptos.

Traditional tokens vs. gold-backed tokens

The majority of Cryptos have no external support or are backed by something. Due to this, some investors do not trust Cryptoy. The fact that Bitcoin’s value is intangible and is not backed by anything of tangible value is one of the main arguments levied on it. Because of the link to actual gold, gold-backed tokens come into play in this situation.

Some investors feel more secure investing in Crypto backed by gold because of the connection to the underlying actual gold. Since gold has a significantly longer history than Cryptos as a store of value and its price changes are simpler to comprehend due to its long history.

It’s important to note that a Crypto backed by gold would ultimately track the price of gold even though the underlying fundamentals may be simpler to understand. So as long as gold does not soar, you can’t anticipate a gold-backed token to do so.

Advantages of gold-backed tokens

The main advantage of investing in gold-backed tokens is that, unlike actual gold, they can be divided into small parts and are digitally stored, making them easier to move and transfer and more economical.

Another major advantage is that gold-backed tokens will keep their value even after a Crypto crisis because their value is pegged to the price of gold. Thus, they are a wise investment when the Crypto market is volatile.

Last but not least, a few gold-backed tokens also provide additional features and advantages, such as access to conventional financial assets like ETFs. Crypto ETFs are traded daily and track the price of digital currencies, enabling investors to diversify their portfolios further.

Disadvantages of gold-backed tokens

The fact that gold-backed tokens are still an emerging concept poses one of the biggest risks. There is also no assurance that the tokens will keep their value and that the companies supporting these tokens will be able to completely fulfill their obligations.

Since gold-backed tokens are linked to the price of gold, there is also the risk that their value will decrease if gold prices fall. Therefore, investors should be aware of the possibilities of such an occurrence, even though it may be rare.

Furthermore, some gold-backed tokens struggle with a lack of liquidity. This might be attributed to a limited investor base because there isn’t much trading on Crypto exchanges, making it difficult to purchase or sell these tokens when one wants to.

Final words

In conclusion, gold-backed tokens present a specific investment option for investors seeking stability and security in the volatile world of Cryptos. These tokens offer investors a dependable tangible asset because of their connection to actual gold. Additional benefits include the ability for segmentation and the potential for access to conventional financial assets like ETFs. It’s crucial to take into account the risks connected with these tokens, such as the potential for the companies who support them to default on their obligations and the potential for low liquidity. Ultimately, investors seeking a comparatively secure investment alternative in the Crypto market should give gold-backed tokens some thought.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Harshita Shrivastava

Harshita Shrivastava is an Associate Content Writer with WazirX. She did her graduation in E-Commerce and loved the concept of Digital Marketing. With a brief knowledge of SEO and Content Writing, she knows how to win her content game!

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