A gold-backed cryptocurrency is a form of cryptocurrency that is backed by physical gold. It can be used for transactions just like others but its value is based on the current price of gold. Each DGC (digital gold currency) defines a single one of its tokens randomly as having an equivalent worth of certain grams or troy ounces of gold, which means this equivalent should be there in the reserve of the company as physical collateralized assets.
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Key takeaways
- Gold-backed cryptocurrencies are backed by actual physical gold that is held in vaults by private companies.
- These digital currencies can be used for transactions but their value would be equal to the current market price of gold.
- According to critics these virtual currencies are too independent and cannot be managed by central authorities during a financial crisis.
Some digital currencies are backed by gold in order so that a derivative asset can be tied to a tangible asset, and resists fluctuations. In other words, these gold-backed cryptocurrencies are more stable and prone to price fluctuations than other cryptocurrencies. This happens because the price of gold is less volatile compared to stocks and digital currencies.
How do gold-backed cryptocurrencies work?
The gold that is used to back these virtual currencies is held in reserves by private companies or trusted custodians like third-party or banks. The backing ratio can differ with each DGC such as some are backed by a 1:2 ratio (1 token is equal to 2 grams of gold) while others have a different ratio.
They are considered an advantageous crypto investment because of their stability and security. As you read above they resist price fluctuations and are less volatile, which makes them a more suitable choice. As gold has been used as a medium of exchange for centuries and with time has generally remained stable, which means the value of cryptocurrency tied to it cannot fall below its price but can rise higher than actual gold’s value, thus making it a more viable option for investment.
Are there any gold-backed stablecoin?
Yes, there are stablecoins backed by actual gold for example- Tether Gold (XAUT), DigixGlobal (DGX), PAX Gold (PAXG), Gold Coin (GLC), Perth Mint Gold Token (PMGT), and Meld. To be precise, gold-backed cryptocurrencies are variants of the stablecoin, as stablecoins are digital currencies that are tied to physical assets.
For example, physical or real-world assets that back stablecoins are fiat currencies such as the US Dollar, gold, or commodities.