As bitcoin is losing some of its luster as “digital gold,” some cryptocurrency investors are apparently seeing value in tokens backed by a physical version of the yellow metal.
According to data compiled by Arcane Research, the total market capitalization of gold-backed tokens has grown 30 times since the beginning of 2020, reflecting a surge in demand.
In particular, pax gold (PAXG), a token launched in September 2019 by New York-based stablecoin issuer Paxos according to the ERC-20 standard of the Ethereum blockchain, has surged in recent months. Its market cap has surpassed that of tether gold (XAUT), another gold-backed cryptocurrency from Tether, the dominant stablecoin issuer.
Tether gold debuted in January 2020, and the two gold-backed stablecoins were in a tight race until May – around the time pax gold was listed on the Indian exchange Wazirx, which is a unit of the giant cryptocurrency exchange Binance.
“India is home to the world’s largest retail gold sales,” Arcane Research said in a statement. “This could be the main explanation for the growing demand for pax gold.”
But according to Karl Vogel, senior product manager at Paxos, the recent success of pax gold stems from growing demand from investors and traders looking to hedge risks from both rising inflation and the highly volatile cryptocurrency market.
The Bureau of Labor Statistics said Thursday that U.S. consumer prices rose about 5% in the 12 months to May, the fastest pace since August 2008 as the economy reopens due to coronavirus-related restrictions and as stimulus money keep coming. in consumer shopping and financial markets.
Many investors have invested in bitcoin over the past year, believing it can serve as a hedge against inflation, a kind of digital gold. But bitcoin’s price has dropped over the past couple of months, changing hands to $ 36,525 at time of publication, well below its all-time high of around $ 65,000 reached in April.
Gold futures have risen about 4% in the past month and are currently trading at about $ 1,896 an ounce.
“If you are an institutional money manager, when the market starts to get volatile and the cryptocurrency market becomes volatile, you may need to carve out your portfolio to compensate for this to make sure you meet certain risk thresholds,” Vogel said. in an interview with CoinDesk. “So, in very volatile times, gold tends to be a very natural and excellent asset class to use and diversify.”
According to CoinGecko, Binance accounts for the majority of PAXG’s trading volume.
Both Paxos and Tether said they are seeing growing demand from institutional investors for gold-backed stablecoins.
Over the past six months, there has been an increase in institutional investors buying Pax Gold directly from Paxos for “large orders”, Vogel said.
“Tether gold may appeal to institutional investors in the digital token space who want access to gold,” Paolo Ardoino, CTO of Tether, told CoinDesk. “People may prefer the digital version of physical gold to physical gold because of its portability.”
Both PAXG and XAUT claim to be backed by one troy ounce of the London Good Delivery 400 ounce gold bar. Each PAXG’s gold backing is held in Brink’s vaults, and yet Teter said the gold underlying XAUT is held in an unnamed Swiss vault.
Tether gold is also issued on the Tron blockchain as TRC20 token.
Tether’s USD-pegged stablecoin, USDT, is the most popular and successful stablecoin in the world, despite a lack of transparency in almost everything.
According to Vetle Lunde, an analyst at Arcane Research, it makes sense that some cryptocurrency investors might try to adjust their portfolios and increase their exposure to gold.
“Gold-backed tokens are very convenient tools for investors looking to invest in cryptocurrency and gold,” Lunde said. “Gold tokens are listed in some of the most liquid cryptocurrency markets,” including Binance, as well as competing exchanges such as FTX, Bitfinex and Kraken, he said.