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Gold and Cryptocurrency: finally united

Photo of: Nathan VDH
by Nathan VDH

The most recognized reserve of value, for a long time and still today is gold. And this is not surprising when you know the properties of this material: it does not rust, can be melted and remelted at will, and above all has a rarity that gives it intrinsic value. Blockchain technology today makes it possible to invest in crypto assets whose value is based on this underlying. We detail in this article the advantages and risks of such an investment.

During periods of crisis and economic uncertainty, investors’ behavior is always the same: they become cautious again, get rid of the riskiest assets in their portfolio, and turn to safe securities, first and foremost gold. And the health and economic crisis of 2020 is no exception to the rule: over the last twelve months, the price of gold has risen by 27%, which is exceptional for a stock whose price moves only very slowly most of the time.

However, investing in gold poses a number of problems: first of all, you cannot buy gold from your banker. You have to go through a specialist trader, move around physically, and know a minimum of the vocabulary and subtleties of this market so that you don’t fall into the most obvious traps.

But the most significant difficulty is of course the storage: opening a safe deposit box at the bank or digging a hole in your garden to store ingots are two possible solutions but which of course pose the problem of trust and expose you to a certain number of risks.

The ideal would of course be to have an investment product whose price follows the price of gold, with the rarity and stability that are its main characteristics, but which is as simple to keep as a bitcoin. For a long time, there have been so-called paper gold products, such as exchange products or certificates that replicate the price and allow investors to open a position without physically holding gold.

Today, it is becoming possible to obtain gold in the form of a crypto asset.

How does it work? The company that manages such a product keeps a certain amount of gold in its own vaults. Each time a customer wishes to acquire a fraction of these reserves, tokens are generated on the blockchain for the corresponding amount. The price of each token follows the price of its underlying and can be resold or exchanged at any time like any other asset on the blockchain.

Of course, here again, vigilance is required. The main risk is that the company selling such a product does not have the quantity of physical gold in its vaults corresponding to the number of tokens available on the market. This is why regular audits of the reserves are necessary to ensure that parity is respected.

There is, therefore, an aspect of trust that needs to be respected, and any company wanting to enter this market has every interest in showing it is respectable and trustworthy, otherwise, investors will quickly go elsewhere.