One of the biggest concerns prospective investors have with the cryptocurrency world is volatility. Big price swings with virtual currencies mean great profits and massive losses can be reaped in minutes.
While many are excited about the industry’s growth potential and understand turbulence comes with innovation, others wonder how they can still invest in digital assets with a semblance of stability.
Many herald stablecoins as a solution. Palladium-backed cryptocurrency all have bullion as a reserve asset. They will never fall below the underlying asset price but can eclipse the spot price depending on the coin’s popularity and trade volume.
Understanding Crypto Backed by Precious Metals
The idea of virtual currency backed by bullion like gold and silver has been tried numerous times. Arguably the most successful before the advent of cryptocurrencies like Bitcoin was E-Gold, co-founded by Douglas Jackson. The coin proved to be very popular at its peak in the 1990s, with at least 1,000 new accounts made each day. However, authorities cracked down on the coin and mandated Jackson to adhere to a variety of financial regulation rules and standards, turning E-Gold into a shadow of its former self.
An ideal modern-day stablecoin should be able to perform main functions. It should have the capability of acting as a medium of exchange to permit holders to buy and sell goods, function as a saving asset (without loss of value), and be used as a unit of account to compare the cost of goods and services.
Stablecoins backed by precious metals stand out for a few reasons. Cryptos backed by fiat currency, like Tether’s USDT, remain the most well-known class of stablecoins. But many are wary of fiat currencies’ long-term stability, especially in 2020, as national governments pursue a variety of artificial stimulus to keep economies afloat during the coronavirus.
The Advantage of Metal as a Reserve Asset
Countless civilisations have treasured precious metals like gold, silver, platinum, and palladium for their utility and beauty. Bullion is recognised and accepted across the world for buying and selling.
While many think precious metals are only valuable as a monetary tool, many have a wide range of industrial and manufacturing uses. Palladium is a vital component in catalytic converters to remove hydrocarbons, carbon monoxide, and other potentially harmful gases from vehicle exhaust emissions. The converter is one of the most expensive parts of a vehicle – often costing up to $1,000 alone.
The vast majority of silver mined in the modern world is a byproduct of manufacturing. The industrial uses of precious metals give them an additional allure of value, making them in the eyes of some a stronger stablecoin base than fiat currencies (or other crypto-collateralised) stablecoins like Basecoin.
Understanding Popular Crypto-Backed Stablecoins
Perth Mint Gold Token (PGMT) is one of the market’s most popular crypto-backed stablecoins. While some projects are vague about their bullion reserves, PGMT tokens are backed by gold from the Perth Mint, managed by Australia’s government.
The Mint offers the GoldPass app that issues a certification with all issued gold bullion. PGMT holders can simply use the app to confirm their digital assets are backed by a gold reserve. Government-backed gold bullion gives PGMT a large degree of legitimacy and viability in the cryptocurrency world, making the token a popular choice for investors interested in crypto-backed stablecoins.
Another well-known choice for those making their first foray into the cryptocurrency stablecoin world is PAX Gold (PAXG). PAXG coins are backed by one ounce of a London Good Delivery Bar. Like PGMT, PAXG coins are seen as highly legitimate in the precious metal backed-cryptocurrency industry due to their connection with a government entity.
PAX Gold’s parent company, Paxos, is a New York State Trust Company and received approval from financial entities in New York to operate. Having to adhere to a wide range of US laws and regulations gives Paxos a degree of credibility in the crypto world – boosting the popularity of its flagship precious metal-backed stablecoin.
What to Watch Out for When Buying Precious Metal-Backed Backed Stablecoins
Investors need to be careful when choosing a precious metal-backed stablecoin to buy. They should carefully study the project’s website to confirm they have audited bullion reserves conducted by a legitimate third party.
Investors should confirm the project has a seamless bullion redemption process that is fair and economically viable. Investing in the wrong project can lead to a loss of money and other headaches.