INTRODUCTION:
Large crypto investors are looking for strategies to mitigate the consequences of growing costs as top tier crypto coins struggle in the face of current skyrocketing inflation. According to Reuters, the progress of gold-backed coins in the crypto world may be seen in the story below.
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BENGALURU (REUTERS) – A fledgling class of crypto that feasts on risk is outshining a wider market paralysed by war and inflation.
Coins backed by gold are newer variants of stablecoins, which are typically pegged to the United States dollar to tame volatility. The largest, Pax Gold or PAXG, has jumped 7.4 per cent in 2022, while main rival Tether Gold has leapt 8.5 per cent.
By contrast, Bitcoin has lost more than 13 per cent and Ether is down 20 per cent.
“One of the main concerns that a lot of people who are new to crypto have is that it is not backed by anything. It just gets on a screen,” said Mr Everett Millman, chief market analyst at Gainesville Coins. “So attaching them or linking them to a real-world commodity… does make some sense.”
The reach for gold, a traditional hedge against geopolitical upheaval and inflation, is unsurprising. The demand for gold-backed cryptocurrencies, though, is new.
Stablecoins, a fast-growing type of cryptocurrency, have emerged as a popular medium of exchange, with traders frequently using them to transfer payments. It is simpler to exchange major stablecoins for Bitcoin or other crypto than it is to exchange traditional money such as US dollars for Bitcoin.
Tether Gold has been buoyed by bigger investors, including “whales” with US$1 million (S$1.36 million) or more of cryptocurrency, using the token to change a portion of their holdings into gold, according to Mr Paolo Ardoino, Tether’s chief technology officer.
“Many of our investors were already involved in crypto, but were interested in not having their entire wealth in cryptos or in dollars, and were seeking more inflation-resistant assets like gold,” he said.
Yet gold-backed coins are still a niche novelty in the crypto market at present – PAXG and Tether Gold are barely over two years old – with thin liquidity and little certainty about their long-term fortunes.
PAXG has seen its market value almost double to US$627 million this year, while Tether Gold has risen 9 per cent to above US$209 million. By comparison, the latter’s eight-year-old sibling, dollar-pegged Tether – the world’s largest stablecoin – has a market cap of more than US$83 billion.
All that glitters?
Sceptics argue that PAXG, developed by the company Paxos, and Tether Gold have merely risen on the coat-tails of a broad rush for gold; indeed, they have tracked the price of physical gold, which is up about 8.5 per cent this year. PAXG is up 4.5 per cent since Feb 23, the day before Russia invaded Ukraine, versus gold’s 4 per cent.
The SPDR Gold Shares exchange-traded fund (ETF), which is managed by State Street Global Advisers, is up 7.6 per cent in 2022.
“The (crypto gold) tokens themselves are not immutable. They are literally just IOUs that happen to be using blockchain infrastructure,” said Mr Alex Thorn, head of firmwide research for Galaxy Digital in New York.
He said investors would have to determine whether they should have the same level of confidence in the companies behind PAXG and the gold ETF.
“They are both basically synthetic gold exposure backed by gold holdings. Perhaps trust is part of the thing that people would consider when deciding whether we can trust Paxos the same way we trust State Street.”
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