Gold-backed stablecoins are a relatively new type of stable digital asset that are backed by physical gold. These come in a variety of flavors, since there are now around a dozen different gold-backed stablecoin providers, but just a handful of these have gone on to achieve significant success.
Since gold-backed stablecoins are backed 1:1 with physical gold, their price tends to closely follow the gold spot price — though the stablecoins usually trade at a slight premium due to their improved liquidity, versatility, and fungibility. As a result of this, most gold-backed stablecoins have significantly appreciated in value in recent months, as the gold spot market booms, and more people than ever before look to invest in gold as a hedge during a time of great economic uncertainty.
But not all gold-backed stablecoins are created equally. Here’s how to pick a good one.
Arguably the first thing you’ll need to look out for is the transparency of the token issuer. Do they provide an easy system to check that the circulating supply matches the amount of gold kept in storage? If not, this could be a warning sign which warrants further investigation.
The current range of popular gold-backed stablecoins all take a somewhat varied approach to reporting and transparency. Some platforms like Perth Mint Gold Token (PMGT) and Tether Gold (XAUt) simply provide periodic updates website to detail the circulating supply of tokens compared to current gold holdings.
CACHE Gold, on the other hand, provides an innovative solution to the transparency problem with its GramChain asset tracking platform. This allows CACHE Gold (GCT) holders to check exactly how much gold CACHE has in each of its vaults, and see and see pictures of each bar, and details about its refiner, serial number, current valuation, and more. Completely eliminating concerns that supply might not match reserves.
2. Minimum Balance and Redemption Value
If you’re investing in a gold-backed stablecoin, then it’s imperative that you take a look at both the minimum investment amount, as well as the minimum redemption value.
The minimum investment amount can be described as the minimum transferrable unit value. For most gold-backed stablecoins, it’s possible to transfer even as little as a tiny fraction of a single token if desired. Others, however, may require transactions to be completed as whole integers, which means holders must hold or transfer at least one whole token. Depending on the token price, this can mean users need to invest or hold more than they might expect.
The minimum redemption amount also comes into play when gold-backed stablecoin users want to convert their coins into real gold. Users with small holdings may find that their balance is below the minimum redemption amount, and will instead need to cash out their holdings another way — such as selling their tokens on third-party exchange platforms.
An overview of the minimum balances and investment amounts for the five most popular gold-backed stablecoins:
|Minimum balance||Minimum Redemption (tokens)||Minimum Redemption (USD)*|
|Digix Gold (DGX)||0.000000001 DGX||100 DGX (100 grams)||$6894.10|
|PAX Gold (PAXG)||0.000000000000000001 PAXG||430 PAXG (430 ounces)||$840,409.|
|Perth Mint Gold Token (PMGT)||0.00001 PMGT||N/A||N/A|
|CACHE Gold (CGT)||0.000000001 CGT||100 CGT (100 grams)||$6894.10|
|Tether Gold (XAUt)||0.0000001 XAUt||430 XAUt (430 ounces)||$840,409.|
* Values are accurate as of August 20, 2020. The minimum redemption amount for PMGT is unavailable.
Depending on the size of your expected holdings and your planned exit route, some gold-backed tokens may fit your needs better than others.
3. Liquidity and Order Book depth
As with almost all cryptocurrencies, gold-backed tokens can be traded on both centralized and decentralized exchange platforms. This is one of the major ways customers can get their hands on these tokens without purchasing them directly from the issuer or minting them by depositing gold.
However, not all gold-backed tokens offer the same liquidity and order book depth, which also means some are better than others at maintaining their price as close to that of gold as possible.
Of the top five gold-backed stablecoins, CACHE Gold (CGT) currently has the highest liquidity. (Image: Live Coin Watch)
One of the simplest ways to check this is by looking at a depth chart of your gold-backed stablecoin of choice. Most platforms display this as a +2/-2 depth chart, which shows the size of the buy order needed to increase of the asset by 2% (+2) and the size of the sell order needed to decrease the price by 2% (-2).
A high value for this indicates a thick order book, high liquidity, and hence resistance to market manipulation.