With the emergence of blockchain technology, buying, selling and trading gold is about to become more efficient than ever. Gold is leaving behind its long and self-destructive paper-based trading past and embarking on a new digital relationship powered by blockchain.
Gold is still as sexy as ever to investors — it represents a trusted cultural symbol of wealth and has a number of inherently desirable features; it is scarce, stable, secure and valuable. However, it is still characterized by many of the same trading methods it has used since the 16th century and is in need of a makeover.
Blockchain’s potential to improve gold as a store of value or a means of exchange is significant. Its inherent properties i.e. transparency, digitalization, transferability, divisibility and security can fundamentally change the way that gold is traded for the better.
Let’s take a look at 5 of the ways in which blockchain could change the way gold is traded, forever.
1. ETFs and gold certificates
· Over the years, gold-related investment products such as ETFs (exchange-traded funds) have been created to provide private investors with indirect exposure to gold as an asset class. However, one of the main downsides of investing in an ETF is that the cost of managing it (up to 3% annually) can outweigh the performance of gold itself.
· Because gold ETFs are easily traded, investors can become saddled with frequent brokerage fees, which can range anywhere from $5 to $50 per trade. However, arguably the larger risk with ETFs is the possible insolvency of the fund provider which could mean that you could lose your investment.
· Private gold investors could avoid the risk posed by their ETFs insolvency by instead investing in gold certificates, which are issued by banks and can be exchanged for physical gold. However, this is not without risk because as we learned from the last financial crisis, banks are no longer too big to fail and certainly not 100% safe for your investment.
· Blockchain technology will replace the inefficient world of “paper gold” with a new efficient ‘digitized gold’ realm, reducing the fees associated with ETFs and avoiding the possibility of investors losing their money in the event of a fund’s insolvency in a bear market panic.
2. Tokenization of gold improves liquidity and security of the asset
· Trading in gold has long been troubled with issues stemming from a lack of liquidity. This lack of liquidity has not been aided by the difficulties that arise from the complex and cumbersome processes of the paper-based agreements private investors have to sign off on, in order to make a trade.
· One of the most useful aspects of blockchain technology is the ability to tokenize assets like gold and create their fractional digital equivalent. Once tokenized, those assets can be traded over different platforms as cryptocurrencies.
· The tokenization of gold would severely decrease these frictions to trade and consequently would introduce new people to gold trading, who were previously put off by expensive procedures or legal complications. Tokenization would increase gold’s liquidity and as a result, its reach.
· Additionally, through tokenization, buyers and sellers will no longer have to worry about security of their gold; resting easily in the knowledge that their digital token would remain immune from theft and stored securely on the blockchain, while the gold itself, is situated in highly secure, fully-insured and audited vaults.
3. Tracking the gold supply
· Obviously, while the blockchain can’t store physical gold, it can be useful in tracking its ownership. It would provide a much more efficient way of maintaining an accurate register of who owns what piece of gold, solving one of the main problems associated with the gold trading industry.
· Blockchain has the power to track every stage of the gold supply chain, allowing the inspection of shipments, bills and invoices. It will also reduce operational costs and increase efficiency and transparency in the supply chain which in turn will increase the overall demand for the asset.
· Blockchain can track gold from the mine to the consumer and strengthen the market’s chain of integrity as a whole. Clearly, in order for this to happen, gold miners would need to get involved from the outset, ensuring that the digitization process starts from the mines, and not from the vaults.
· Another impact that the blockchain could have on the tracking of gold would be to make the supply chain more transparent and discourage gold bullion manufacturers from using conflict-gold. Such tracking would help to put an end to gold-smuggling from conflict zones and the violence associated with it.
4. Reduce barriers to entry and fees
· Blockchain provides investors easy, low-cost access to gold as an investment. It will change the way gold is traded by reducing the fees associated with such trades. It will also remove the frictions that happen every time the exchange of physical gold is recorded in a traditional ledger.
· Blockchain will also help manage much smaller amounts of gold than are commonly traded by institutional investors and high-net-worth individuals. It will offer the promise of a more robust and cost-efficient mechanism which can facilitate the settling of those smaller gold transactions.
· Blockchain will allow private investors to trade with other members of the marketplace at all times of the day without the need for financial institutions to oversee any payments. As such, blockchain offers all of the advantages of trading gold without the barriers associated with buying, storing and insuring the gold.
5. Offering stability to a volatile cryptocurrency market
· Traditional cryptocurrencies are not backed by underlying physical assets, which contributes to their price volatility. In fact, the value of traditional cryptocurrencies is only backed by market feeling and the trust placed in them by investors, which can lead to speculative bubbles and unpredictable price crashes.
· However, gold has long provided investors with a level of protection against the debasement of FIAT currencies and has acted as a hedge against inflation and provided economic stability in times of geopolitical uncertainty. In a number of different ways, gold is a perfect asset class to be traded on blockchain.
· Blockchain has the power to change the way that gold is traded in a number of different and beneficial ways. The digitization of gold will allow for the immediate settlement of trades, secure verification of the quality of the underlying asset and tracking of supply in the market.
· As the trend of digitization of assets grows, we will see the tokenization of a number of other physical assets, allowing us to transfer their value digitally as well. In the long term, blockchain could ultimately result in a new NASDAQ, featuring a wider range of tradable assets and a reduction of listing costs, settlement time, and transaction costs.
· Any means of value exchange that doesn’t need an institutional authority is a potentially ground-breaking innovation. The only remaining hurdle that blockchain must overcome is to convince people to adopt the technology as an investment vehicle. If we can do that, we may just be embarking on the dawn of a new era based on gold as an investment.