The rise of cryptocurrency in recent years has led to a surge of interest in gold-backed digital currencies. Some may wonder why risk-averse gold investors would be interested in entering a market known for volatile currencies. Conversely, the idea of digital gold has increasingly held appeal to a technologically savvy demographic looking for an alternative way to store wealth in the modern world.
A history of digital gold
In 1995, not long after the internet went mainstream, E-Gold emerged as the first digital currency backed entirely by gold. At its peak, the currency was backed by 3.8 metric tons of gold, worth more than US 85 million, and traded by millions of people around the world.
However E-Gold’s status as a controversial alternative currency system made it an attractive target for criminal activity and, after years of investigation into illegal transactions, it was shut down in 2009.
Subsequent attempts to make a digital gold currency led to several look-alikes, but this was before the age of bitcoin and blockchain technology. As the prosecutor at E-Gold’s trial put it, “[the entire digital currency world] is a bit of a wild west right now”. Regulators fought to define this new kind of company which operated in the shadows between bank and money transmitter.
With the establishment of blockchain technology as an increasingly accepted secure accounting method, and as bitcoin becomes a household name, a new era of gold-backed cryptocurrency has emerged. These technological advances, buoyed by the recent surge in the gold price, has led to the next gold rush – this time in the digital world.
Gold-backed tokens
The basic concept for digital gold on the blockchain is certainly compelling. A token is issued that represents a value of gold (for example, 1 ounce of gold equals 1 token). The ounce of gold is stored by a trusted custodian and can be traded with other token holders. The nature of blockchain ensures these transactions are secure and anonymous, recorded on a decentralised network of computers spread across the world.
Convenience and anonymity aren’t the only benefits. At a minimum, the price of the coin will always equal the current gold rate – but, like all currencies, there is potential for increase. If the gold-backed token gains popularity, the price of the token can surpass the value of gold. If the token doesn’t take off, it will still retain its value of the ounce of gold.
The rise of the stablecoin
With the vast majority of new cryptocurrencies entering the market proving to be inflated, volatile or unreliable, the ‘stablecoin frenzy’ began in 2018.
An answer to the ‘wild price swings’ seen in unbacked cryptocurrencies such as bitcoin and ether, stablecoins aim to achieve stability and decrease the volatility that is frequently associated with cryptocurrency markets. Stablecoins such as gold-pegged tokens are considered to be among the least volatile and most trusted investments on the blockchain.
Despite this, gold-backed tokens remain vulnerable to the inherent risks of the digital world – many of which are the same risks early adopters of digital gold such as E-Gold had to contend with. While the blockchain accounts for the tokens, physical stored gold is another matter. With a plethora of gold-backed tokens now on the market, it is important to consider who actually owns the gold and how it is stored.
Trusted by institutional and individual private investors as an organisation dedicated to taking Australian gold to the world, The Perth Mint is the custodian of gold-backed token Perth Mint Gold Token (PMGT). Recently issued by leading digitalisation company InfiniGold, PMGT is the first gold token on a public blockchain backed by government guaranteed gold. It allows users to conveniently acquire and have entitlement over physical gold stored by The Perth Mint in a trusted and cost-effective way.
PMGT offers superior transparency, risk diversification and hedging against market volatility as a representation of physical gold that, backed by a reputable and trusted custodian, brings a new level of credibility to the cryptomarket.
Learn more about PMGT.
