Leveraging blockchain technology has made it possible to tokenise almost everything ranging from traditional markets such as real estate to tangible assets such as sports teams. Similarly, tokenised gold is a relatively new idea that has gained popularity over the past few years.
Tokenised gold functions similarly to stablecoins, but instead of being pegged to a fiat currency, it is pegged to a similar worth of gold on a 1:1 basis. The tokens also represent digital ownership of physical gold and, in some instances, can be traded for it on the open market. Let’s take a look at how tokenised gold differs from traditional gold.
Traditional Gold Vs Tokenised Gold
While traditional gold has deep roots in traditional finance, its size and weight present a major challenge. Transporting gold over great distances can be difficult and storing it can be costly. Furthermore, determining the authenticity, purity, and integrity of traditional gold requires expert analysis, which raises the cost of dealing with the asset.
In contrast, tokenised gold is easier to track, trade, and convert because of the underlying use of blockchain technology. Additionally, storing the gold digital counterpart on the blockchain allows anyone to own fractions of it if they desire, unlike traditional gold which is normally preferred by large institutional investors and the affluent public.
Tokenised gold has also been well-received among risk-averse investors who have long been eyeing the crypto space but are reluctant to participate due to extreme volatility.
Furthermore, if you own tokenised gold, you hold the physical gold it represents, which adds to a greater value while investing in the asset. Pax Gold, for example, says that each token is backed by appropriate gold reserves held in Brink vaults in London.
What impacts the price of tokenised gold?
Tokenised gold is directionally proportional to the real-time value of gold, In other words, the value of tokenised gold rises if gold prices rise and vice versa if gold prices fall. However, sharp changes in the supply and demand of tokenised gold in crypto exchanges could also alter its price.
For instance, a massive spike in stablecoin Terra’s supply caused the token to fall to 99 cents, losing its peg against the US dollar. In an unexpected twist, panic selling ensued and caused the price of UST to drop as low as 0.09 cents.
Additionally, tokenised gold can lose value should the company backing it fails to produce proof of holding appropriate reserves. For example, stablecoin USDC dropped to 87 cents after Circle, the company managing the stablecoin, revealed that over $3 billion of the cash reserves backing USDC were locked in the now-defunct Silicon Valley Bank. Since a stablecoin, and by extension, tokenised gold, represents a specific quantity of another asset, losing its peg against the underlying asset can essentially make it worthless.
Conclusion
Macroeconomic troubles surfaced in 2022 in the aftermath of the COVID-19 pandemic and Russia’s war on Ukraine. As a result, soaring inflation rates led to an increase in safe-haven assets such as gold. According to the World Gold Council, annual global demand for gold rose by 18 percent to 4,741 tonnes, its highest percentage increase over the last 12 years.
Meanwhile, CoinDesk recently reported that tokenised gold assets crossed the $1 billion mark in combined market capitalisation following the recent surge in gold prices.
With that said, tokenised gold could continue to emulate its counterpart’s success should its market remain free of isolated crashes.
Although tokenised gold is yet to hit the mainstream markets, it is soon being recognised as a potential long-term investment. Going forward, launching more crypto products related to gold can bring more investors into the ecosystem and increase the asset's liquidity.
However, investing in tokenised gold and engaging in relatively new decentralised finance requires thorough research. It is advised to learn all aspects and prospects of investing in stablecoins before investing.
