Gold-backed Tokens: Hidden Potential, Drawbacks, Prospects

In today's investing world, assets such as gold have been labelled safe-haven assets that can help investors mitigate the effects of inflation and currency depreciation. While gold has held this title for decades, technological advancements have propelled digital assets such as Bitcoin (BTC) into the spotlight.

The current economic environment has caused gold to confront major headwinds not seen in approximately 30 years. It demonstrates that neither Bitcoin nor Gold is immune to economic inconsistencies; nonetheless, compared to fiat and other similar assets, the pair has outperformed significantly.

Inherent Challenges of Gold as a Store of Value

The status of gold as a store of value is universally acknowledged. Gold has various distinguishing characteristics that have fueled its global demand as a single commodity. The precious metal is durable, non-corrosive, and highly liquid, making it a truly unique medium of exchange.

While the benefits of gold are frequently publicized, particularly by dealers, several drawbacks limit the asset's adoption. The first issue is counterfeiting. Because gold is so common, its fake versions can be manufactured, making it difficult to trace them.

Even though testing models (though not completely reliable) have been developed to combat these counterfeits, investors must still contend with storage issues and the incidence of theft from criminals. These difficulties are not limited to gold; they are a major problem for all physical commodities.

Integrating Blockchain Technology to Solve Gold’s Woes

The beauty of innovation is that almost any problem can be solved. In the case of gold, the incorporation of blockchain technology has proven to be a very effective tool in combating counterfeiting, among other issues.

With regard to gold, blockchain can be used in different ways, including tokenization and storing the asset's history on the immutable public ledger. These two models help simplify the storage challenges and combat counterfeit gold, as all assets can have a unique inscription through which they can verify their originality on a blockchain.

The idea of improving gold through blockchain technology is already being implemented by some of the Web3 ecosystem's most innovative startups, including but not limited to Zambesi Gold (ZGD), Pax (PAXG), and Tether (XAUT). While each of these projects is distinct in its own right, they all follow the same model of pegging gold on a 1:1 basis with real physical gold.

The current market price of gold determines the value of these and similar digital currencies. Each gold-backed cryptocurrency identifies a single token as being worth the equivalent of a certain number of grams or troy ounces of gold. Physical collateralized assets in the company's reserves, vault, or a trusted custodian serve as the equivalent.**

An investor can profit from the rise in the gold price and the rise in the cryptocurrency market using such a tool. Gold provides relative price stability because it is less volatile than stocks. The crypto component provides higher price growth potential than traditional gold investments.

It is also worth noting that blockchain allows for fractionalization, which lowers the entry barrier for those looking to invest in a new, hybrid type of asset. A gold-backed token, whose price is obviously lower than gold's, could also be a great way to diversify because an investor can put in a small amount of money, implying that price fluctuations are less likely to harm their wealth.

Although this asset class is still relatively new to the market, the community has already witnessed some gold-backed tokens fail during a market downturn.

So, at the end of this article, I'd like to give you a couple of tips that will help you decide whether it's worthwhile to try to invest in a gold-backed token or if you should look for another opportunity:

1. Determine the role of physical gold in the company's business: is it just an investment solution or something they mine or use for production?
2. Check if a company has a license to issue such assets.
3. Check if a company has its own custodian trust, stores gold in an independent bank, or if the token is simply told to be pegged to the price of gold.
4. Go to the company's website and look for a detailed description of tokenomics: the calculations and goals should be clear.
5. Examine the token's features and utilities: compare average gold and crypto returns to projections for this token to see if they are realistic.

You can invest with forethought if you find that the company has long-term goals and a robust business to back up its offering. Keep in mind that the token's fate will depend less on the market and more on the sound judgment of those responsible for issuing it. A product with a solid project behind it will be able to weather even the worst economic downturns.