With the emergence of blockchain technology, buying, selling, and trading gold is about to become more efficient than ever. Presently, few people buy gold-backed digital currency with Bitcoin. However, 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 many inherently desirable features. It's 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 needs a makeover.
Blockchain's potential to create gold-backed crypto is significant. Its inherent properties, such as transparency, digitalization, transferability, divisibility, and security, can fundamentally change the way gold is traded. In this article, we'll look at five ways metal-backed blockchain could change how gold is traded forever.
Over the years, gold-backed cryptocurrency has existed through other investment products such as ETFs (exchange-traded funds), which were created to allow private investors to have direct 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 ranging from $5 to $50 per trade. However, arguably the more significant risk with ETFs is the fund provider's possible insolvency, which could mean losing your investment.
Private gold investors could avoid the risk posed by their ETFs insolvency by instead investing in gold ownership 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.
Metal-backed blockchain technology has the potential to replace the inefficiencies of gold ETFs or so-called “paper gold.” Gold-backed crypto can greatly reduce fees as well as mitigate the possibility of investors losing money in the event of a fund's insolvency in a bear market panic.
Trading in gold has long been troubled with issues stemming from a lack of liquidity. However, this lack of liquidity has not been aided by the difficulties arising from the complex and cumbersome processes of the paper-based agreements private investors have to sign off on to make a trade.
One of the most valuable aspects of blockchain technology is the ability to create gold-standard tokens that are digitally equivalent to the actual value of gold. Once tokenized, gold-backed crypto can be seamlessly transferred and traded across various platforms via blockchain technology.
The idea of creating a gold-standard token would severely decrease trade frictions and introduce new people to gold trading who previously were 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 the security of their gold. Instead, they can rest easy in the knowledge that their digital token would remain immune from theft and stored securely on the blockchain, while the underlying gold is stored safely in vaults such as Brinks, regarded as one of the most secure vaults in the world.
While the blockchain can't store physical gold, it can help track its ownership. It would provide a much more efficient way of maintaining an accurate register of who owns what piece of gold, acting like a certificate of gold ownership and 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, increasing 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. For this to happen, gold miners would need to get involved from the outset, ensuring that the digitization process starts from the mines, not from the vaults.
Another impact 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. In addition, having a gold-backed digital currency would end gold smuggling from conflict zones and the violence associated with it, as each piece of gold can be tracked.
Blockchain provides investors easy, low-cost access to gold as an investment. It will change how 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. In addition, the ability to buy cryptocurrency backed by gold will offer the promise of a more robust and cost-efficient mechanism that 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 ensuring the gold.
Traditional cryptocurrencies are not backed by underlying physical assets, contributing to price volatility. 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. This situation may cause some not to buy gold crypto with Bitcoin.
However, gold has long provided investors with a level of protection against the debasement of FIAT currencies, acted as a hedge against inflation, and provided economic stability in times of geopolitical uncertainty. In several ways, crypto backed by gold is a perfect asset class to be traded on the blockchain.
Blockchain has the power to change the way that gold is traded in many different and beneficial ways. The idea of gold-backed digital currency will allow for the immediate settlement of trades, secure verification of the quality of the underlying asset, and track the gold supply in the market.
As the trend of digitization of assets grows, we will see the tokenization of many 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 more comprehensive range of tradable digital assets and reducing listing costs, settlement time, and transaction costs. We will also see more traders buy gold-backed crypto with Bitcoin.
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 and buy crypto backed by gold Bitcoin. If we can do that, we may just be embarking on the dawn of a new era based on gold as an investment.
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