Stable-Coin Series: A Perspective on Stable Coin Pegged to Gold

Federal Reserve of the U.S. came up with interest rate cut for the first time since the 2008 financial crash. As a result, the U.S. markets retortedaccordingly, subsequently, all three major indices dropped with a great deal.

While investors marched from equities to 10-year U.S Treasuries to bolt their portfolios. However, most surprisingly, a digital asset of the modern era has also joined this sentiment, yes, Bitcoin also surged from its monthly lows of $9,479 to $10k levels.

While articulating, the 10-year yield of Treasury Note was at a 1.6%, inching towards its historic low, although it is categorized as one of the most luring fixed income instruments in the world. 

While on the other hand, countries like Japan are facing inflation problemes, Is the cryptocurrency, in reality, immune to inflation? It’s a feature of the low-inflation era that very few governments or central bankers want a strong currency. That’s just one considerable reason as to why Bitcoin is doing so well. Strong currencies depress inflation, at least temporarily, and if their impact on competitiveness is exaggerated, it’s still enough to make them take the blame for jobs being lost to other cheaper-currency producers. In the event of hyperinflation or total market collapse, it might end up more fungible than the local fiat currency.

The emergence of bitcoin and subsequent blockchain technologies has generated a new digital asset class in which scarcity is based on mathematical properties. 

Despite the digital currency ecosystem has been luring among the investors’ community, a report argues that gold has been able to maintain its investment demand due to lower volatility. It also highlighted that “gold trades in regulated and well-established venues and has long been accepted by institutional investors as an investment alternative. This is not the case for cryptocurrencies.”

Similar to gold-ETFs, all of the gold-backed cryptocurrencies on the market are centralized. This means they have counterparty risk. Unlike storing your own physical gold, gold-backed cryptocurrencies require you to trust a company for storage.

There are three main types of centralized, collateralized stable-coins: fiat, commodity, and crypto. Gold-backed cryptocurrencies are considered to be centralized and “off-chain-backed coins.”  The most famous gold-backed cryptocurrency is the Digix Gold Token (DGX). DGX has a market capitalization of approximately USD 4mn and a daily trading volume of approximately USD 240,000 over the past year. Even though Digix is backed by gold, it often trades at a discount to gold, and Digix’s return is extremely volatile compared to gold’s return.

Gold-backed cryptocurrencies have higher costs and risks than ETFs and managed gold funds. Investors can suffer the loss of value due to faulty private key storage, double-spends from weak blockchain security, regulatory uncertainty, lack of liquidity, and non-transparent accounting of gold vaults.

Concluding the topic, the report stated, “there are over fifty gold-backed coins currently, and most likely, many of them will fail. It will take a few years for the market leaders to emerge, gain widespread exposure, and thus secure the standing of gold-backed tokens as a store of value.”

As of now, no cryptocurrency exchanges are licensed to trade tokenized (gold) exchange-traded funds (ETFs), which currently stands as the biggest barrier for gold-backed crypto to gain market share.