A study by digital asset research outfit, Crypto Research, compares 3 Gold-Backed Stablecoins to determined which is best. In the CR newsletter Demelza Hays weighs the merits of Perth Mint’s Gold Token, PAX Gold (PAXG), and Digix Dao (DGX) against one another, as well as against purchasing – with crypto – physical gold through Vaultoro or Bitpanda.
During Bitcoin’s 2017 price rally – the biggest post-halving rally to date – the digital asset, usually touted as digital gold, achieved parity with gold. This sparked interest in stablecoins, not just fiat-backed, but digital assets that represented fractional value of actual gold as well.
To date, there are over 77 iterations of gold backed digital assets. Interestingly however, there are already more than 30 such initiatives that have already failed. Despite blockchain publication, Cointelegraph, suggesting a number of reasons why gold-backed stable coins may be an unwise investment, the Covid-19 related financial crisis appears to have triggered a spike in demand for gold-backed digital assets.
Demand for gold-based stablecoins was so high that gold collateralized tokens, across the board, traded at a premium in comparison to the spot price of actual gold. Physical gold, on the other hand, became less available as Coronavirus lockdowns proved detrimental to industrial supply-chains. This suggests that investors took to digital representations of gold, in response, as the need to hedge against a global market crash certainly did not diminish.
The Best Gold-Backed Token
With so many digital asset projects purporting to be wholly – or at least in some part – backed by the yellow meta, the question remains, which of them is best?
Hays, who recently consulted the Cayman Island’s based Dash Investment Foundation on an asset rebalancing strategy, made her assessment according to five fundamental questions:
- Does the token holder or buyer also – through the token – own the gold that backs the token?
- If the company goes bankrupt, does the token holder lose their investment, or is it legally protected?
- How much liquidity does the gold-backed token enjoy? Do the token’s daily trading volume and market capitalization allow investors to sell the gold-token and close their position at a moment’s notice?
- Is there a correlation between the token’s price and the price of actual gold, and to what degree? Is there a premium or a discount on the token in comparison to gold markets?
- How restrictive are the fees?
Having studied the tokens from the 1st of December 1019 to April 24th of 2020, Hays found that – of the three gold-coins in question – DGX had traded below the spot price of gold until mid-March when demand for gold-backed tokens grew to a point that they all traded at a premium against the spot price of gold. Hays also discovered that DGX’s price bounced all over the chart while PAXG offered the most price stability.
PAXOS’s gold pegged token also enjoyed the most liquidity and daily trading volume in comparison to it’s two counterparts. However, Australian government backed PMGT (which is fully exchangeable for a certificate of ownership of an ounce of Pert Mint refined gold) to be the most regulated, and therefore, the one with the least custodial risk, as well as fees. DGX lost out in the fee department, logging the highest fees per trade.
Hays’s analysis also touched on the alternative of simply buying gold via blockchain platforms, Vaultoro & Bitpanda. The researcher concluded that the spread between bid/ask orders resulted in a premium that may prove restrictive. Couple that with the platforms’ high fees and low trading volumes and the idea is a virtual nonstarter.
Of the gold-coins she examined however, Hays concluded that PMGT would – theoretically – be the best option. PMGT’s governmental oversight (allowing government the ability to freeze one’s assets at will) and low trading volumes proved to be it’s Achilles heel though. PAXG then takes the crown, on merit of volume and price stability. Investors wanting to acquire gold tokens will likely want to do so quickly, and be certain of getting the exact value (minus fees) they wish to spend. PAXOS Gold appears to tick all the rite boxes, in that regard.