All things Crypto/Blockchain have become a passion for me.
However, the stand-off between the US and Iran succeeded in raising global tensions. The balance of power across the world is shifting and the threat of war is never far away. The recent Coronavirus outbreak has alarmed world markets and we are starting to see a reaction.
Disquieting signs of an economic downturn are now rearing their ugly heads. Central banks across the globe are presiding over negative interest rates. A shaky Repo market has required the Fed to pump billions of dollars in on a daily basis. Quantitative easing has started up again under the guise of the Fed buying stocks with their seemingly never-ending printed money.
What goes up must come down, and a bear market must appear sooner or later. Traditionally, money coming out of a plummeting stock market usually finds its way into precious metals such as gold or silver. History suggests that precious metals will certainly gain in value during this time. Nevertheless, buying gold and silver has fundamentally just served as a way to store and hold value until things improve in the stock market.
That is until now…
Gold is not just a store of value and although nearly 80% of gold ends up being manufactured into jewelry, use cases in industry are also leading to higher demand — uses in industries such as electronics, computers, dentistry, medicine, and aerospace are helping to perpetuate the demand for gold. When you combine use in industry, with the fact that gold is a traditional hedge in uncertain economic times, being able to not just hold it but to monetise its value becomes a powerful use indeed.
Silver has become vastly under-valued in recent years but this is about to change. As well as a hedge for a down-turn in stocks, silver is being used far more in industries such as photography and solar energy and has a growing use in medicine. The silver market is just tiny in relation to other commodity markets and if silver could be spent just like cash then exponential growth of this market could well follow.
In short, in the extremely uncertain world in which we live, where fiat currencies appear to be in a race to the bottom, precious metals endure as they always have. They are the ultimate safe haven and when an economic downturn starts to become more apparent gold and silver will be where the intelligent investor will look for that hedge against the inevitable drop in the stock market.
However, there is one problem with precious metals and that is the ability to actually spend them. It’s all very well having a portion of your wealth in some bomb-proof vault in Switzerland but releasing that value immediately in order to take advantage of a particular buying opportunity is just not feasible. Therein lies one of the huge disadvantages of hedging into precious metals — they are sluggish to move in and out of.
That is until blockchain enabled the fractionalising of commodities such as precious metals.
The advent of blockchain is revolutionising many industries. The advantages of immutability, security and transparency are enabling blockchain to disrupt and vastly change these industries. The precious metals sector is also ripe for disruption and the potential for putting gold and silver on the blockchain is simply huge.
Several blockchain startups have already identified the opportunity here and have already entered the precious metals arena. In order to elaborate further on the possibilities, I’ve outlined some of these ventures here:
Lode — Put Your Idle Silver to Work
Lode seeks to restore silver as a means of payment just as it has been for centuries. In the present time, silver, just as it is with gold, is stored in a vault or is securely kept on an owner’s premises. Many people around the world ‘stack’ silver — looking for a safe financial hedge. However, its value is locked up for some future event and until that event, it is just a value that is unable to be easily liquidated and utilised.
That is until now…
Lode has 2 forms of value on its platform — the LODE token is like a digital receipt for a customer’s silver, which is stored in a Lode secure vault. The AGX token is like a stable representation of exactly one gram of silver held in the vaulted Lode silver bullion reserves.
A client either contributes silver or buys it and it is then securely held in the Lode bullion reserves. In short, the client is using their own silver to purchase a financial instrument which generates a passive income in the form of digital silver (AGX). Of course, the client also has the right to withdraw their AGX at any time should they request it, in a minimum amount of 1000 ounces (amount to be reduced in the future).
The AGX coin is also how you spend your silver. In total contrast to actual physical silver, the AGX coin can be spent speedily, at low cost and privately without any middlemen. AGX coins can be spent by way of POS, apps, ATM networks, debit cards and exchanges. Each transaction is notarised on the blockchain and is transparent and immutable.
Silver has always been a successful means of payment throughout millennia and given the problems that fiat currency is facing in these uncertain times, a return to real money in the form of silver-backed digital money is a proposition that makes absolute sense and has every chance of succeeding.
Digix — unlocking the value of gold on the blockchain
Digix is tokenising gold bullion to be used as a means of exchange. It does this by linking the traditional world of gold with the cutting edge, high tech world of crypto. Now, everyone can have access to the value of gold without having to actually own the metal and face the risks and costs that this ownership implies.
Blockchain transactions are fast and cheap, therefore it would make perfect sense to unlock gold’s value and use it to transact without friction and borders — a match made in heaven.
Digix is using the power of the Ethereum blockchain which allows the entire process of purchasing, storing and auditing the gold to be totally transparent for a client to see 24/7 either online or in-person at Digix’s safehouse vault in Singapore.
Digix transforms 1 gram of gold into 1 DGX token by utilising its Proof of Provenance protocol (PoP). This acts to draw together the third parties involved in verifying and securing the token minting process. The DGX token can be held as a representation of physical gold or spent through the use of partner digital wallets or exchanges etc.
The Digix eco-system uses 2 tokens. So besides the DGX token there is also the DGD token which is used in order to participate in decentralised governance. This enables holders to have a say in the future direction of Digix and to help push adoption. Holders of DGD can submit proposals to further the aims of the eco-system and can also vote on proposals submitted by others. Points are accrued by active participants and these can be exchanged for ‘rewards’.
Vaultoro — bridging the gap between cryptocurrency and gold
Bitcoin and gold are increasingly seen as having similar characteristics. They have their own store of value outside of a fiat ecosystem backed by debt and thin air. However, up to now, it hasn’t been easy to trade between the two. Bitcoin is such a nascent asset that volatility does make it an extremely complex and risky trade. Investors and traders generally use a stable coin such as Tether in an attempt to avoid the downturns and to peg their investment to the relative security of the US dollar.
Tether has its own issues of trust and reliability so more and more stable coins are entering the arena, giving their own cases for preferred use. However, they are all paired with fiat which has its own trust issues.
The Vaultoro trading platform enables customers to immediately transfer out of bitcoin and into gold, thereby providing the ultimate safe peg. When bitcoin is making one of its strong swings to the upside clients can take this trade by buying into this volatile asset. When things are uncertain Vaultoro customers can make an instant switch back into the maximum safe harbour of gold and wait for the next momentum swing.
Besides being the first crypto-to-physical-gold-exchange, Vaultoro is also the first crypto exchange to utilise the lightning network for deposits, which nullifies what can be the slower times of the Bitcoin network transactions. Now a client can send bitcoin in order to make a purchase instantly, thereby negating any risk of their bitcoin sitting in a hot wallet waiting for confirmations.
The actual gold deposits used by the Vaultoro platform are not held by Vaultoro at all. For maximum safety and in any worst-case scenario all gold is held in Swiss vaulting facilities, fully insured and audited and beyond the reach of any central authority.
What are the challenges facing the tokenization of precious metals?
The principal challenge I would see here would be the ready adoption of these platforms. The economy is not seen as failing in the eyes of the vast majority of investors out there. The writing is not on the wall — why should it be? The stock market continues its skyward trajectory. What is the point of hedging out of the dollar?
I won’t go into the manifold reasons as to why we should be thinking about withdrawing from our fiat currencies — there are many economists who can do that far better than I can. What I will say though is that most will not be aware of a crash until it happens, it’s only then that the average investor will look for the safe haven of precious metals.
Another challenge can be that of trust. It will take a real change of mindset for a lot of people to change what they are presently doing with precious metals. So many people either stack precious metals at home or store them in a bank vault. Tokenisation of assets on the blockchain is a relatively new concept and even though ‘trust’ is one of the raisons d’etre for blockchain, many will not see it this way and will wait for others to blaze this path.
Finally, one more reason for not using crypto/precious metal platforms is that perhaps the common investor is just not ready to embrace this technology yet. Investing in gold and silver is maybe more for the careful financial plodder who doesn’t want to complicate matters with technology — no matter the numerous financial advantages on offer.
A financial ‘reset’ could well be on the cards, even in the relatively short term of the next few years. History teaches us that all fiat currencies fail at some point. Fiat currency will not endure into the foreseeable future — it has nothing behind it except the power and influence of governments and their central banks. This power is on the wane and a time of reckoning is nearing as the debt burden becomes ever more pressing.
Technology continues to advance and the digital age is well upon us. Governments are beginning to recognise the advantages of digital currency but they will need to back these currencies with something more tangible than promises that have proven to be more air than substance.
The two foremost precious metals of gold and silver have served civilisation for millennia and now they are making a return in the form of hard money backing of ‘trustless’ digital currencies. What we have missed over the last century is this trust, and the immutability of blockchain is serving to combine tradition and technology for a currency system that will last the ages.
Forward-thinking platforms such as Lode, Digix and Vaultoro, are the forerunners of the new digital age and it could be expected that they succeed in shaping the currency system of the future. I for one will be following their advance with interest.