A budding class of cryptocurrency that mostly feasts on risk is now outshining a wider market that is currently paralyzed by inflation and war.
The coins backed by gold are the newer variants of ‘stablecoins’ that are normally tethered to the dollar to reduce volatility. The biggest, Pax Gold (PAXG), has gained 7.4% in 2022, while its main rival Tether Gold has gained 8.5%.
On the contrary, bitcoin has lost at least 13% and Ether is down nearly 20%. The chief market analyst at Gainesville Coins, Everett Millman, stated:
“One of the main concerns that a lot of people who are new to crypto have is that it’s not backed by anything. It just gets on a screen. So attaching them or linking them to a real-world commodity, it does make some sense.”
The reach for gold, a traditional hedge against inflation and geopolitical conflicts, is not surprising. Nevertheless, the demand for these gold-backed cryptos is new.
Stablecoins, a fast-growing sector of cryptocurrency, has come up as a common medium of exchange, mostly used by the traders looking for ways to move funds around. It is now quite easy to swap the major stablecoins for bitcoin and other cryptos, for instance, than it is to swap the traditional money like the US dollars for bitcoin and other major cryptos.
Tether Gold has been supported by the bigger investors, including the whales who hold $1 million or more of crypto, using this token to change some of their holdings into gold, based on a statement by Tether’s chief technology officer, Paolo Ardoino. He stated:
“Many of our investors were already involved in crypto, but were interested in not having their entire wealth in cryptos or in dollars, and were seeking more inflation-resistant assets like gold.”
Yet, the gold-backed coins are still a niche novelty in the cryptocurrency space currently – PAXG and Tether Gold are around two years old – with thin liquidity and dwindling certainty about their long-term fortunes.
PAXG has already seen its market value nearly double to $627 million in 2022, while Tether Gold has gained 9% to settle above $209 million. By comparison, the latter’s 8-year-old sibling, dollar-pegged Tether; the world’s biggest stablecoin, has a market cap of more than $83 billion.
Based on data acquired from CoinMarketCap, daily PAX gold trading volumes ranged from $10 million to $520 million in the past month, compared to the ether volumes that fluctuated between $8.7 billion and $25 billion in April. On its part, Tether’s 24-hour volumes ranged between $35 billion and $92 billion.
All That Glitters?
Critics say that PAXG, developed by Paxos Company, and Tether Gold have barely gained anything on the coat-tails of a massive rush for gold. They have just tracked the price of physical gold which is currently up by around 8.5% in 2022. PAXG has gained 4.5% since February 23, the day before Russia invaded Ukraine, compared to gold’s 4%.
The SPDR Gold Shares exchange-traded fund (ETF) that is managed by State Street Global Advisors has gained 7.6% so far in 2022. In that context, the head of firmwide research for Galaxy Digital in New York, Alex Thorn, stated:
“The (crypto gold) tokens themselves aren’t immutable. They’re just IOUs that happen to be using blockchain infrastructure.”
He stated that the investors would need to determine whether they need to have the same level of confidence in the firms behind the gold ETF and PAXG.
“They’re both synthetic gold exposure backed by gold holdings. Perhaps trust is part of the thing that people would consider when deciding whether we can trust Paxos the same way we trust State Street.”
Nevertheless, advocates of these coins believe that they provide the ease of owning gold without needing to worry about storing a physical bar or coin while getting rid of the minimum margin needs mostly required to trade gold on the traditional markets.
For example, PAXG needs a minimum investment of the equivalent of 0.01 ounce of gold, about $20, compared to the $184 an investor would have to pay for every share of the SPDR Gold ETF.
Millman at Gainesville Coins also insisted that gold-backed stablecoins boosted the credibility of cryptos. He stated:
“One of the main criticisms of cryptos is that they have been so extremely volatile. Hence, the idea to back a token with a stable commodity. The marriage between those two things could also bolster confidence in cryptos.”