A nascent crypto class that feasts on risk is eclipsing a broader market crippled by war and inflation.
Gold-backed coins are new variations of “stable coins”, which are usually pegged to the dollar to tame volatility. The largest, Pax Gold or PAXG, jumped 7.4% in 2022, while main rival Tether Gold jumped 8%.
In contrast, bitcoin lost more than 13% and ether is down 20%.
“One of the biggest concerns for a lot of people new to crypto is that it’s not backed by anything. It just shows up on a screen,” said Everett Millman, chief market analyst at Gainesville Coins. “So tying them or tying them to real-world merchandise makes sense.”
The search for gold, a traditional hedge against geopolitical upheaval and inflation, is not surprising. The demand for gold-backed cryptocurrencies is new, however.
Stablecoins, a fast-growing breed of crypto, have become a common medium of exchange, often used by traders looking to move funds. It is easier to exchange major stablecoins for bitcoins or other cryptos, for example, than to exchange traditional money like US dollars for bitcoins.
Tether Gold has been backed by bigger investors, including “whales” with $1 million or more in cryptocurrency, using the token to turn some of their holdings into gold, according to CTO Paolo Ardoino from Tether.
“A lot of our investors were already involved in crypto, but wished they didn’t have all their wealth in cryptos or dollars, and were looking for more inflation-resistant assets like gold,” he said.
Yet gold-backed coins are still a niche novelty in the crypto market right now – PAXG and Tether Gold are just over two years old – with low liquidity and little certainty about their existence. long-term wealth.
PAXG saw its market value nearly double to $627 million this year, while Tether Gold rose 9% to top $209 million. By comparison, the latter’s eight-year-old sibling, dollar-pegged Tether — the world’s largest stablecoin — has a market capitalization of over $83 billion.
According to data from CoinMarketCap, daily PAX gold trading volumes have fluctuated between $10 and $520 million over the past month, compared to ether volumes which have fluctuated between $8.7 and $25 billion. in April. Tether’s 24-hour volumes pegged to the dollar ranged between $35 billion and $92 billion.
EVERYTHING THAT SHINES ?
Skeptics claim that PAXG, developed by the Paxos company, and Tether Gold simply rose in the wake of a broad gold rush; indeed, they have tracked the price of physical gold, which has risen around 8.5% this year. PAXG is up 4.5% since Feb. 23, the day before Russia invaded Ukraine, compared to 4% for gold.
The SPDR Gold Shares exchange-traded fund, which is managed by State Street Global Advisors, rose 7.6% in 2022.
“The (crypto-gold) tokens themselves aren’t immutable. They’re literally just IOUs that use the blockchain infrastructure,” said Alex Thorn, head of global research. business for Galaxy Digital in New York.
He said investors should consider whether they should have the same level of confidence in the companies behind PAXG and the gold ETF.
“They’re both basically synthetic gold exposure backed by gold holdings. Maybe trust is part of the thing people would consider when deciding if we can trust Paxos of the same way we trust State Street.”
Nevertheless, proponents of these coins claim that they offer the ease of owning gold without having to worry about storing a physical coin or bullion, while eliminating the minimum margin requirements often required to trade. gold in traditional markets.
PAXG, for example, requires a minimum investment of the equivalent of 0.01 ounce of gold, or about $20, compared to the $184 an investor would pay for each share of the SPDR Gold ETF.
Millman of Gainesville Coins also argued that gold-backed stablecoins boost the credibility of cryptocurrencies.
“One of the main criticisms of cryptos is that they have been so extremely volatile. Hence the idea of backing a token with a stablecoin,” he said. “The marriage between these two things could also boost confidence in cryptos.”