Cryptocurrencies have continued to make headlines for being one of the world’s most volatile assets, with Bitcoin leading the charge. To help reduce the volatility of cryptocurrencies, the stablecoin was born. Each stablecoin is backed by another asset of value, stabilizing its price. There are several stablecoins in existence, including coins backed by fiat money, other cryptocurrencies, and exchange-traded commodities. While each of these has its benefit, the history of gold backing other currencies is one concept that has recently been adopted again.
Even in the 19th century, the US dollar was backed by gold to reduce inflation. Although the practice was abolished, many still took note of the power of inflation on a fiat currency and made attempts to adopt it in their cryptocurrencies. The result was GoldCoin and other precious-metal backed currencies such as Silver Coin and Palladium Coin. As these assets continue to gain popularity and be made available on exchanges like Gold Exchange, many have begun to ask if gold-backed stablecoins are the new cryptocurrency standard?
Benefits of cryptocurrencies backed by gold
Gold has several defining qualities that make it a good backing for a cryptocurrency asset. Among the most notable are:
One of the main reasons Bitcoin is believed to be so volatile is its different perceptions of its worth. While some see digital assets as the future, others question if the value is just a fad that will quickly pass, losing its value altogether. Although some investors live for the thrill, the volatility is a deterrent for many. Fortunately, the backing of a stable asset with a proven history of value for thousands of years can be enough to equalize the volatility and suggest sustainable and perpetual growth for the future. This incremental growth can position gold-backed stablecoins as the safe long-term investment and legal tender, as initiatives for stablecoin payments are launched.
Issues around liquidity are believed to be one of the leading causes of volatility. While cryptocurrencies are high in demand, many have decided it is safer to hold their cryptocurrencies in a wallet rather than trade them. Fewer trades on exchanges result in reduced liquidity of each asset. A gold-backing helps to improve liquidity since gold consistently retains the same demand levels.
Cryptocurrencies were born to be deflationary from the get-go, having only finite amounts ever created. Compared to central banks that continue to print fiat money, cryptocurrencies are already leading in this regard. Gold, too is limited in quantity, making it less subject to inflation. The interesting thing is that since the 17th century, gold has always increased in purchasing power, despite periods of deflation. In times of uncertainty, gold or a gold-backed cryptocurrency (the next best thing) can act as a hedge against the loss of value due to inflation.
Like other popular currencies, gold-backed stablecoins are easily accessible to a new trader and can be purchased without a brokerage. New traders can purchase tokens in the same way they would purchase any other cryptocurrency. Some of these methods include using a cryptocurrency exchange or, more specifically, a precious-metal backed cryptocurrency exchange. On these platforms, opportunities exist to buy the stablecoin with a debit or credit card in many cases.
New use cases
Additionally, as the infrastructure supporting gold-backed cryptocurrencies continues to be refined, there is an increase in blockchain applications that can provide more use cases for cryptocurrency in general. One example of a potential use case is collateral for a cryptocurrency loan.
Gold’s high value continues to make it a good investment and stable asset to back cryptocurrencies. As the development and refinement of these assets continue to grow, gold-backed stablecoins are believed to continue raising the bar for expectations around stablecoins and the cryptocurrency industry in general.