Gold-Backed CryptocurrenciesYour Guide to Buying Digital Gold on the Blockchain

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Gold-Backed Cryptocurrencies

Gold-backed cryptocurrencies are “stablecoins.”

A stablecoin is an asset-backed cryptocurrency. Each digital token represents a legally binding claim over some part of a real-world asset.

The process of representing ownership of a real-world object… or a share of a real-world object… as a digital token is called “tokenization.”

Projects are emerging that tokenize vintage cars… diamonds… wine… and, of course, gold.

New projects tokenizing gold are hitting the market almost monthly. Soon, gold-backed cryptos will become commonplace.

But it’s still early days for the gold-backed crypto market. Which is why, as an investor, you should do your due diligence before you jump in.

To help you get started, we’ve put together a simple checklist. It will help you make sure the gold-backed cryptos you invest in are top-flight projects with secure gold backing.

What to Look for in a Gold-Backed Crypto

There are a few questions you should ask before you buy a gold-backed crypto.

Will the project be around in a year?

• Does the team have experience in precious metal custodial services?

• Do the team members attend various crypto conferences throughout the year? You want the team to be an active member of the crypto community.

• Gold-backed crypto projects are small, so they’re often built on top of an established network, like the Ethereum or Bitcoin blockchain. Has the founder or lead developer from the network the gold-backed crypto is using given positive feedback on the project?

Gold-Backed CryptocurrenciesYour Guide to Buying Digital Gold on the Blockchain | By Andew Hodges

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Gold-Backed Cryptocurrencies

How is the gold audited?

Make sure your crypto is backed by the amount of gold the counterparty claims is there.

Is the gold insured?

Lloyd’s of London tends to be the standard for insurance providers in the precious metals market.

If the company folds, what is the redemption process?

How many jurisdictions are involved? Say the vault is located in Europe, the company is domiciled in Malta, and you are a U.S. citizen. If the project shuts down, does it have a clear process laid out for redeeming your original investment or the gold it says you own?

What are the laws of the country where the operations are based?

If cryptocurrencies are not viewed favorably where operations take place, the government could shut down operations at any point.

So make sure you find a project operating out of crypto-friendly jurisdictions. That applies to the project’s headquarters as well as the vault.

Does $1 equal $1?

If the project says 1 token = 1 gram of gold, make sure the price of the token equals the spot price of gold. You can check gold’s current spot price here.

Once you’ve done your research on the questions above, there are a few more points to consider…

Whitepaper

Read the project’s whitepaper. This is where the project details how it plans to spend the revenue it generates. Make sure it passes the sniff test.

Fees

Fees are necessary. They ensure the project can continue operating. But as an example, incurring a 5% fee to buy the token and another 5% when redeeming may be a little excessive. So do your research.

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Gold-Backed Cryptocurrencies

You may run into three fees. The first fee is charged when you purchase the crypto. Yearly maintenance is the second potential fee. The third fee is charged when you redeem your gold-backed crypto for gold.

When looking at gold-backed crypto fees, ask yourself: Is the premium I’m paying over alternative investment vehicles worth it?

Some people will be willing to pay a higher fee than others in order to have a crypto backed with gold… and the potential ability to use the crypto for everyday purchases. Others are looking for the lowest-cost option. (As a point of reference, exchange-traded funds charge a fee of about 0.25%-0.5% a year.)

As the space matures, expect the fees to come down.

The Secondary Market

Gold-backed cryptos can trade on secondary markets. This means you can trade your gold-backed cryptos for other cryptos and vice versa. These markets tend to be small, meaning only a few trades take place daily.

This offers a way to reduce fees. While this is a nice work-around, you will most likely need to register with the project in order to redeem the gold. So make sure the project operates in your jurisdiction.

Cryptocurrency Storage

When it comes to storing cryptos, the user tends to be the custodian, or said differently, his own bank. This is preferred. Make sure this option exists with the gold-backed crypto you are considering.

Keep in mind that keeping your gold-backed cryptos on an exchange or on a platform increases the risk of your funds getting stolen. Instead, consider storing them in a secure crypto wallet.

Gold Redeemability

If you plan to redeem your cryptos for gold, do your research before committing to a project. Some projects don’t have delivery options, or they may not deliver to your jurisdiction. That means you may have to visit the vault in person to pick up your gold.

So, if you plan to redeem your cryptos for gold, and the project you’re interested in doesn’t have a mail option for your country, make sure you’re able to make the trip to the vault before you commit.

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Gold-Backed Cryptocurrencies

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