Gold-pegged tokens are outperforming the overall growth of the crypto market, despite concerns from some analysts about the reliability of tokens, as well as the very wisdom of investing in the yellow metal.
The market capitalization of XAUT, the largest gold-backed stablecoin, has quadrupled since early January 2021 to $421.3 million, according to CoinGecko. The second-largest gold-backed stablecoin, PAX gold (PAXG), has quintupled to $378.3 million. According to analytics firm Arcane Research, the market capitalization of the two tokens has increased by 360% compared to 150% for all cryptocurrencies.
“Many investors want to take part in the volatile class of crypto assets, and gold-backed tokens provide some protection against volatility,” said Edward Moya, senior market analyst at foreign exchange broker Oanda. "Gold tokens may continue to attract huge appeal as gold's outlook for the year improves."
Many investors in traditional financial markets see gold as a hedge against inflation, similar to how many crypto traders think that bitcoin could increase in value if the dollar's purchasing power is undermined.
Gold as a store of value
Some investors also argue that gold can be a safe haven in times of geopolitical turmoil, which is why recent tensions between the US and Russia over Ukraine have heightened bullion's appeal. This tension has been cited as the driving force behind the $1.6 billion influx into the world's largest gold fund at the end of January. The price of gold rose 2.8% last month to trade at $1,849.71 an ounce, gaining as shares tumbled. Bitcoin is up 0.6% over the same period. Analysts said the latest data showing inflation at its fastest pace in four decades provides some support for gold.
The economic and market environment may be fueling a surge of interest in gold tokens among crypto traders.
“Commodity-backed tokens are becoming more and more popular,” Arcane wrote on Feb. 8. “So far, mostly gold-backed tokens have attracted investment, but other commodities may soon follow.” Russian nickel and palladium giant Norilsk Nickel was approved on February 3 by Russia's Central Bank to issue commodity-backed tokens through its subsidiary Atomyze.
Since gold tokens are pegged to the price of the yellow metal, the rising market capitalization does represent an increase in the number of tokens being issued, analysts said.
"What you're talking about is issuing gold-backed tokens," said Mati Greenspan, CEO of Quantum Economics and a former senior analyst at eToro. "If they want to release them, they release them."
The market value of gold tokens, which is currently around $800 million combined, pales in comparison to Bitcoin's $833 billion. And of course, the price action for gold in recent years has been anemic compared to many cryptocurrencies that have risen in prices many multiples.
“For investors, there is little return for gold-backed tokens as the price doesn’t change much,” Greenspan said.
Demand and the "digital scarcity"
With gold tokens, when the price rises, gold miners can try to mine more and increase the supply. The supply of bitcoin, in contrast, is controlled by the original programming of the underlying blockchain. When the price rises, the increase in supply remains the same.
“When it comes to digital asset valuation, it seems like the digital scarcity itself is far more powerful than the additional benefits of tying it to metal or other physical materials,” Greenspan said.
Garrick Heeleman, Head of Research at Blockchain.com and Visiting Fellow at the London School of Economics, said that gold-backed tokens bring benefits such as fast settlement, zero minimum purchases and high transferability. However, the foreclosure process is not always so smooth: sometimes it can take days or weeks, he said. Greenspan noted that investors may have to believe that issuers of gold-backed tokens are actually buying gold to back them.
The Arcane report notes that several projects have tried to create tokens backed by commodities other than gold, such as silver or palladium, but have encountered various obstacles along the way. One silver token offer was flagged as a scam. The big question hanging over dollar-backed stablecoins like USDT Tether is whether it has the proper reserves to back these tokens. Tether, the largest dollar-pegged stablecoin, has a market capitalization of $78.6 billion, according to CoinGecko. But its issuer, Tether, was subject to ske
