Gold-Backed Tokens Grow Despite Mixed Reviews From Analysts

Gold-backed tokens are outpacing the overall growth of the crypto market, despite some analysts' concerns about the reliability of the tokens as well as the very wisdom of investing in the yellow metal.

The market capitalization of XAUT$4,489.65, the largest gold-backed stablecoin, has increased fourfold since the start of January 2021 to $421.3 million, according to CoinGecko. The second-biggest gold-backed stablecoin, PAXG$4,500.14, has grown fivefold to $378.3 million.

On a combined basis, the market cap of the two tokens has increased 360%, versus 150% for all cryptocurrencies, according to the analysis firm Arcane Research.

“Many investors are looking to get involved with the volatile crypto asset class, and gold-backed tokens provide some protection against volatility,” said Edward Moya, senior market analyst at the foreign-exchange brokerage Oanda. “Gold-backed tokens could continue to see massive appeal as gold’s outlook for the year improves.”

Gold is seen by many investors in traditional financial markets as a hedge against inflation – similar to the way that many traders in crypto markets think that bitcoin might increase in value if the dollar's purchasing power erodes.

Gold as store of value

Some investors also argue that gold might be a safe haven in times of geopolitical turmoil, so the recent tensions between the U.S. and Russia over Ukraine have added to the appeal for bullion. These tensions have been cited as a driver for a $1.6 billion flow into the world’s largest gold fund at the end of January.

The price of gold is up 2.8% in the past month, trading at $1,849.71 per ounce, gaining while stocks fell. Bitcoin (BTC) is up 0.6% during the same period.

Analysts said that recent data showing inflation at the fastest pace in four decades is providing some support for gold.

The economic and market environment might be fueling a surge in interest in gold tokens among crypto traders.

“Commodity-backed tokens are growing in popularity," Arcane wrote on Feb. 8. "So far, primarily gold-backed tokens have attracted investment, but other commodities may soon follow.” The Russian nickel and palladium giant Nornickel was approved on Feb. 3 by the Central Bank of Russia to issue commodity-backed tokens through its subsidiary Atomyze.

Since the gold tokens are tied to the price of the yellow metal, the rising market capitalization really just represents an increase in the number of tokens outstanding, analysts said.

"What you are talking about is that there is issuance of gold-backed tokens," said Mati Greenspan, CEO at Quantum Economics and former eToro senior analyst. "If they want to issue them, they issue them."

The market value of the gold tokens, now around $800 million combined, pales in comparison with bitcoin's $833 billion.

And, of course, the price action on gold in recent years has been anemic compared with many cryptocurrencies whose prices have gone up by many multiples.

“For investors, there’s little profit for gold-backed tokens as the price does not change much,” Greenspan said.

Supply, demand and 'digital scarcity'

With gold and gold tokens, when the price goes up, gold miners can try to dig up more and increase supply. Bitcoin's supply, by contrast, is controlled by the underlying blockchain's original programming. When the price goes up, the supply growth stays the same.

“When it comes to valuation of digital assets, it seems that digital scarcity in and of itself is far more powerful than the added benefits of tying it to a metal or other physical materials,” Greenspan said.

Garrick Hileman, head of research at Blockchain.com and a visiting fellow at the London School of Economics, said gold-backed tokens bring advantages, such as fast settlement, zero minimum purchases and high transferability.

The redemption process isn't always so smooth, though: Sometimes it can take days or weeks, he said.

Greenspan noted that investors may need to trust that the issuers of the gold-backed tokens are actually buying gold to back them up.

The Arcane report pointed out that several projects have tried creating tokens backed by commodities other than gold, such as silver or palladium, but have met various obstacles along the way. One silver-backed token offering has been marked as a scam.

A big question hanging over dollar-backed stablecoins such as Tether's USDT is whether it has proper reserves to back up those tokens.

Tether, the largest dollar-linked stablecoin, has a market capitalization of $78.6 billion, according to CoinGecko. But its issuer, Tether, has been the subject of skepticism over the reserves it uses to back USDT.

“Just because somebody said to you they are offering you gold-backed tokens doesn’t mean that you can actually trust them that they are actually backed by physical gold,” Greenspan said.