Some cryptocurrency enthusiasts have promoted Bitcoin as a “digital gold” since it burst on the scene in 2009, but now a variety of digital currencies that claim to be actually backed by the precious metal are coming to market. “Gold tokens are appealing due to a confluence of events: Weakening real interest rates and weakening national currencies combined with increasing regulatory clarity around non-security tokens and the natural appeal of gold to investors,” as Danny Masters, chairman of London-based CoinShares, told Bloomberg in detailed report summarized below.
The organization behind the Tether stablecoin, the most used cryptocurrency, plans to launch Tether Gold before Christmas. This token will be backed 100% by gold bullion, according to Paolo Ardoino, the chief technology officer (CTO) for Tether and its related entity, the Bitfinex trading platform. Other recent debuts of similar products include Paxos Gold in September, and the DGLD token from CoinShares Group in October. The number of gold-related tokens is now over 20.
- Digital currencies backed by gold are growing in numbers.
- They promise easier trading than physical gold.
- Verifying their actual reserves may be an issue.
Significance For Investors
“Gold has been, historically, an important asset for risk contingency," as Ardoino remarked. A leading rationale for the rash of new gold-linked digital coins is that they promise much easier ownership and trading than actual gold bars, which are bulky and require secure storage either by the investors or by custodian institutions.
Each DGLD token is supposed to be backed by 1/10 of a troy ounce of gold, and the issuers report having stored $20 million worth of gold in a Swiss vault. The spot price of gold was around $1,866 per ounce as of July 22, 2020. A potential source of confusion arises from the fact that DGLD also is the ticker symbol for the Velocity Shares 3x Inverse Gold ETN, which is linked to the S&P GSCI Gold Index (DGLD).
Winning the trust of investors may be a key hurdle for purveyors of the new gold-linked digital assets. For example, the private Hong Kong-based company behind Bitfinex and Tether has been under investigation by both the U.S. federal government and the State of New York for alleged misappropriation of $850 million in client and corporate funds. The federal probe also involves allegations that these entities facilitated manipulation of the price of Bitcoin, while a payment processing firm used by Bitfinex is under investigation in Europe regarding drug-related money laundering, per other reports.
Moreover, Tether, which is widely used in the trading of other digital currencies, is only 74% backed by cash and short-term securities, despite having claimed that it is 100% backed by U.S. dollars. Tether's reserves are not audited independently. Nonetheless, despite these negatives, the Tether stablecoin has a market capitalization of $10 billion that is still growing.
“I wouldn’t be surprised if there was significant customer interest,” observed Sam Bankman-Fried, Hong Kong-based CEO of crypto trading firm Alameda Research. “A lot of crypto traders also have opinions on gold,” he added.
Aaron Brown, an investor and a writer for Bloomberg Opinion, has a contrary view. “No one has had much success with non-USD stablecoins, or gold-backed crypto, so I don’t anticipate anything major happening here,” he remarked.