What Is the Relation Between Gold and Cryptocurrency?
With the advent of cryptocurrency comes groundbreaking investing innovations. Meanwhile, gold remains the sturdy and trustworthy safe-haven asset that conservative investors love. In this article, we’ll talk about the relationship between gold and cryptocurrencies, as well as the rising popularity of gold-backed cryptocurrencies. Check it out!
What is Cryptocurrency as an Investment
Cryptocurrencies are investments that run on the blockchain, a digital public ledger of transactions. As an investment, cryptocurrency, specifically bitcoin, is treated as “digital gold” because of its weak relationship with other assets.
It also shares many similarities with gold. For one, bitcoins are limited in number; their total supply is limited to 21 million tokens. Apart from that, cryptocurrencies aren’t used by a central bank or federal government as legal tender. Like gold, bitcoins and other cryptocurrencies are mined, albeit through the combined computing powers of people.
What is Gold as an Investment
Gold is a strong safe-haven asset, meaning investors turn to gold when other financial markets are shaky. When stocks drop, traders and investors usually seek shelter in gold or gold-backed assets. Apart from that, gold is valuable for regular consumers in the form of jewelry.
And, as mentioned, its supply is scarce. Gold can only be mined and not manufactured the way that banks print money or companies issue shares. Because of these characteristics, gold has almost no correlation with assets like stock indices and forex currencies. Previously, gold was tied to the US dollar until former US President Richard Nixon severed that tie. Since then, investors have used gold as a cushion against stock market failures and crashes.
Combining Their Benefits
Gold and cryptocurrencies used to be considered unrelated; while bitcoin is highly volatile and a favorite among speculators, gold is a stable, safe-haven asset preferred by conservative investors.
However, recent developments in light of the COVID-19 pandemic have resulted in cryptocurrencies being market leaders. However, cryptocurrencies react to speculation in a wild way; even a trivial, offhanded tweet by a popular CEO can cause crashes in its value. In other, the huge gains that crypto-assets promise comes with huge risks.
Meanwhile, gold has always served as protection against inflation. In fact, experts predict that gold stocks could grow 10 times in the next three years. Wall Street estimates are also bullish for 2021, with an ounce of gold expected to cost $2,300 to $2,400.
To marry both cryptocurrencies and gold benefits, investors are turning to commodity-backed crypto projects; specifically, they search for gold-backed cryptocurrency. These crypto-assets leverage gold’s safe-haven appeal as their store of value. If you’re a conservative investor, you’ll love gold-backed tokens because they combine gold investments with the upside, scarcity, and flexibility of the cryptocurrency world. On top of that, gold-backed tokens help investors who are uncomfortable with cryptocurrency investing.
Gold-Backed Cryptocurrency Explained
Simply put, a gold-backed token whose value is equivalent to certain grams or troy ounces of gold. That means the equivalent of the token should be present inside the reserves of the issuing company.
Unlike other cryptocurrencies, whose values are speculated, the value of gold-backed tokens is tied to a real, tangible asset — gold. This protects the token from extreme price fluctuations. Another great advantage of gold-backed tokens is that they can be divided into smaller units and transferred easily to another party.
On the flip side, gold-backed cryptocurrencies have historically struggled with the following issues:
- Liquidity: gold-backed tokens aren’t traded across many exchanges, making it difficult to traders to cash in on their investments.
- Centralized Safekeeping and Auditing: investors must rely on central third parties to store their gold and audit their investments. This ultimately defeats one of the main purposes of cryptocurrencies, which is < rel="nofollow" href="https://www.dummies.com/personal-finance/investing/decentralization-of-cryptocurrency-is-a-good-thing/">decentralization.
- Finding Proof of Reserves: investors must ascertain whether the issuing company truly has the claimed reserves and gold backing. If not, then it’s a red flag.
Because of these issues, you must consider carefully whether gold-backed assets are for you. You can ask yourself the following questions:
- Do you fully understand what cryptocurrency investing means?
- Do you know how to choose a trustworthy issuer?
- Can you keep us with the rapidly changing technology underpinning these investments?
- Can you tell a scam from a genuine transaction?
- Have you done enough research about gold-backed assets?
Answering these questions can help you truly prepare for investing in gold-backed tokens.