In the face of market instability and the specter of stagflation, investors are looking for security and have found it in gold-backed cryptocurrencies. The market capitalization of these tokens has increased by 60% so far this year compared to the same period in 2021, to over 1 billion for the first time in their history. Gold itself is up nearly 14% so far this year, reaching US$2,050 an ounce, its highest level since August 2020.
Gold-backed cryptocurrencies, such as PAX Gold and Tether Gold, are digital tokens whose ownership is recorded in a similar way to cryptocurrencies such as Ether and Bitcoin. In this case, each token represents one troy ounce of gold. Their linkage to a physical asset makes them less prone to the large price fluctuations that affect other cryptocurrencies, at least in theory.
Buying gold through this type of cryptocurrency makes it possible to invest in that asset without the need to physically acquire a bar. It could be equated to buying an exchange-traded fund that replicates the price of gold, with the difference being that investors can exchange them for physical gold instead of just cash, as is the case with Exchange-traded funds or ETFs.
Both PAX Gold and Tether Gold, the leading gold-backed cryptocurrencies, hit highs on Tuesday following a drop in stock market indices. On the day, the former hit US$2,071, its highest price in the past three months. Tether gold, on the other hand, rose to its highest point in a year, to US$2,076. Since January 1, both tokens are up more than 8%.
Currently, PAX Gold’s total market capitalization is $607 million, up 85% year-to-date, while Tether Gold’s rose to nearly $211 million, up just 9.20% over the same period.
Another factor to consider is the instability caused by Russia’s invasion of Ukraine. Rising energy and commodity prices have increased inflationary pressure. In this scenario, inflation erodes the purchasing power of the currency, which in turn makes gold more expensive and, with it, the value of gold-backed cryptocurrencies.