Could Crypto Users Turn to Gold-Pegged Tokens Amid Bear Market?

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Could Crypto Users Turn to Gold-Pegged Tokens Amid Bear
Gold maintains its safe-haven status, while comparison with Bitcoin and stablecoins persists.

 

Gold has been a proven protective hedge against inflation for years. Now in the persisting aftermath of Terra’s collapse and continued geopolitical tensions, some crypto investors might be turning to gold-pegged tokens to weather the crypto winter. 

Stablecoins’ Struggles Spotlight Gold

Stablecoins were created in response to crypto’s volatility. They are a hybrid between the volatility of cryptocurrencies and the stability of fiats or commodities. This means that they achieve stability by being collateralized to a fiat currency (mainly the USD), being collateralized to a commodity (e.g. gold), or through algorithmic mechanisms that constantly peg the tokens to the said fiat (e.g. UST).

The Market after Terra Crash

Before Terra’s collapse, Terraform’s flagship coins – Terra (LUNA) and Terra USD (UST) – occupied the 9th and 10th slots in the global top 100. However, following their implosion, the two coins disappeared off the illustrious list, and what followed was a major market reshuffle. 

Major stablecoin Tether (USDT) saw its biggest reduction yet since 2017.  The leading stablecoin’s market cap is likewise down by more than 13% over the last month, a loss of around $12 billion. Tether is not the only stablecoin that has investors redeeming tokens. In fact, other less-popular stablecoins had it much worse.  

Algorithmic stablecoins MIM, Frax, and DAI have all recorded a significant reduction in supply over the past month. MIM’s market supply is down by more than 86%, while Frax has lost almost half of its market cap.  

Shortly after UST imploded, Deus Finance’s DEI became the third stablecoin to significantly depeg from the $1 mark. Three weeks later, DEI still trades well below $1 at $0.75.

Amid the instable crypto market, gold prices continue to remain reliable, prompting even more bullish predictions from Goldman Sachs. The banking giant believes the precious metal could hit $2300 before the end of the year. This would be its highest since 2020.

Indeed, it is clear from the aforementioned developments that non-fiat backed stablecoins are increasingly not favored by investors. Ir also makes sense that tokens like USDC and Paxos’ Gold and BUSD gained supply when algorithmic tokens like UST and Frax struggled. 

These recent events in the cryptoverse—the bearish market and the fall of Terra—have done two things: (1) raised questions about the stability of currency-pegged stablecoins, and (2) shifted focus gradually to fiat and commodity-backed stablecoins.   

The Gold Standard in a Digital Present

So far, volatile market conditions have not torn down gold’s value. For decades, gold has shown itself as a means to safeguard against inflation. Of late, the metal has seen a rise in value, and analysts predict a bull market through the rest of the year. Experts at Goldman Sachs revealed that its value would likely rise from $1950 per ounce to $2300k or $2400k. Timothy Ord, head and editor of the electronic newsletter, Ord Oracle, forecasts a 10-fold increase in 3 years.

With gold’s viability in the limelight, gold-backed cryptocurrencies have naturally appeared as acceptable alternatives to regular cryptocurrencies and suitable substitutes for stablecoins—especially following the recent tension in the stablecoin market. 

Is Gold Taunting Bitcoin in the Latter’s Space?

With Bitcoin’s advent into the financial market, its proponents branded it as the perfect replacement to all elements of traditional finance—from fiats to gold. Proponents believed (and still believe) that Bitcoin would disrupt the centralized nature of fiats and replace gold as a safe haven. So far, Bitcoin—and its many outshoots—has, to a large extent, lived up to expectations when it comes to fiats. However, it has not done so well as a safe haven alternative. In fact, some cryptocurrencies need gold to maintain stability. A need that gave rise to gold-pegged stablecoins such as Paxos Gold (PAXG) and Tether Gold (XAUt).

Through gold-pegged cryptos, gold heightens the appeal of the cryptoverse. It allays the fear of potential investors who are scared of the volatility of cryptocurrencies as gold-pegged cryptos merge the easy access that drives the appeal of cryptocurrency and the stability of the precious metal.

Investors can easily trade and transfer these assets across a wide range of exchanges. Additionally, users don’t have to invest vast funds as they would likely have to with physical gold. An individual can purchase gold-pegged tokens in small, fractionalized portions.

Generally, gold-backed cryptocurrencies are similar to traditional finance offerings such as gold ETFs, which provide holders with exposure to the price action of physical gold and eliminate the need for physical ownership. But gold-backed tokens aren’t without their attendant challenges.

Challenges Facing Gold-pegged Tokens

Gold-pegged crypto assets sometimes possess features that make them lose their sheen. Tether Gold, for one, has tedious redemption requirements—investors need to hold an entire gold bar to redeem any amount. The barrier to entry is also high as the minimum investment amount is about 50 XAUt, roughly $90k as of January this year.

Furthermore, most gold-pegged tokens reside on the Ethereum blockchain. This means that investors would still face the problem of high gas fees when transacting gold-backed stablecoins. 

It is also worthy of consideration that gold-backed tokens rely on centralized service providers who manage the physical gold. So while the crypto industry is focused on eliminating decentralized systems, gold is tugging back to the center. Also, holding a large store of precious metals by these service providers is a risk in itself. If the parent company fails to house the supply properly, investors could see their tokens fall in value alongside the gold. 

The Popular Examples of  Gold Coins

Not many crypto tokens are backed by gold. But there are few that are current favorites among market participants. These tokens include Paxos Gold, Tether Gold, and VNX Gold. 

Paxos Gold (PAXG)

Each token in its Paxos Gold offering denotes one fine troy ounce of a 400-ounce London Good Delivery gold bar. PAXG investors own the underlying gold, which the company keeps securely in vaults. The platform recently cut its token purchase limit and eliminated custody payments providing investors with easy entry. 

Tether Gold (XAUt)

TG Commodities Ltd allows XAUt investors to interact with real-world gold prices. Investors can view their specific backing gold bars and the ounces they hold. They have to visit the Tether website and enter the wallet address containing their Tether Gold tokens. In addition, the firm grants access to ETFs and other TradFi services. 

Other projects include Australia’s Meld Gold, GoldCoin, and VNX. Australia’s Meld Gold pairs each token to a gram of gold and doesn’t store the physical metal personally. Instead, various establishments in the supply chain hold the gold in an interestingly decentralized manner. 

“The Desire of Gold is Not For Gold…”

Given the lackluster performance of currency-pegged stablecoins amid the Terra saga, it is understandable why crypto users would seek alternatives. However, crypto users must always bear in mind that Satoshi Nakamoto’s aim wasn’t to create a financial system for profit alone but primarily for freedom. Say freedom from traditional financial systems. Say freedom from centralization.

So, when crypto users decide to shift towards gold-pegged stablecoins, it should be because they need to align with crypto’s tenet and objective. This shift should perhaps embody the words of Ralph Waldo Emerson: 

The desire of gold is not for gold. It is for the means of freedom and benefit.”

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Regardless of the massive strides digital currencies continue to make, it is clear there is still a place for gold—now in the present, and, predictably, in the near future.

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Written by

PK daami

Daami PK

@Daami

333 posts

PK Daami is a content writer, fiction lover, and AI developer. He writes or has written for outfits like Realm, ChangeNOW, and SatoshiLab’s Invity.

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