Gold Tokens Take Off as Inflation Accelerates, Bitcoin Retreats

As bitcoin loses some of its luster as “digital gold,” some cryptocurrency investors are apparently seeing value in tokens backed by the physical version of the yellow metal.

According to data compiled by Arcane Research, the total market capitalization of gold-backed tokens has grown 30-fold since the start of 2020, reflecting a surge in demand.

In particular, PAXG$4,212.95, a token launched in September 2019 by the New York-based stablecoin issuer Paxos under the Ethereum blockchain’s ERC-20 standard, has seen steep growth in recent months. Its market capitalization has surpassed that of XAUT$4,201.11, another gold-backed cryptocurrency from Tether, the dominant stablecoin issuer.

Tether gold made its debut in January 2020, and the two gold-backed stablecoins were in a close race until May – around the time when pax gold was listed on India-based exchange Wazirx, which is a unit of the giant cryptocurrency exchange Binance.

“India is home to the world’s largest retail gold,” Arcane Research said. “This could be the major explanation for the growing demand for pax gold.”

But according to Carl Vogel, senior product manager at Paxos, the recent success of pax gold is due to rising demand from investors and traders looking to hedge risks from both rising inflation and the highly volatile crypto market.

The Bureau of Labor Statistics reported Thursday that consumer prices in the U.S. rose about 5% in the 12 months through May, the fastest pace since August 2008, as the economy reopens from coronavirus-related restrictions, and as stimulus money continues to make its way into consumer purchases and financial markets.

Many investors have put money into bitcoin over the past year on the belief that it could serve as an inflation hedge, a type of "digital gold" as it were. But bitcoin’s price has tumbled in the past couple of months, changing hands at $36,525 as of press time, well off the all-time high near $65,000 reached in April.

Gold futures have climbed about 4% over the past month, and currently trade at about $1,896 an ounce.

“If you are an institutional money manager, when the market starts to become volatile and the crypto market starts to become volatile, you may need to allocate your portfolio to compensate for that to make sure you are meeting your certain risk thresholds,” Vogel said in an interview with CoinDesk. “Therefore, gold tends to be, in very volatile times, a very natural and great asset class to go ahead and diversify into.”

Binance accounts for most of the trading volume of PAXG, according to data from CoinGecko.

Paxos and Tether alike said they were seeing growing demand from institutional investors for the gold-backed stablecoins.

In the past six months, according to Vogel, there have been more institutional investors who are buying Pax Gold directly from Paxos for “large order sizes.”

“Tether gold may appeal to institutional investors in the digital token space that want exposure to gold,” Paolo Ardoino, chief technology officer at Tether, told CoinDesk via a spokesperson. “People may prefer the digital version of physical gold instead of the physical gold itself because of its portability.”

Both PAXG and XAUT claim to be backed by one fine troy ounce of a 400-ounce London Good Delivery gold bar. The gold backing each PAXG is stored in Brink’s vaults, and yet Tether said the underlying gold for XAUT is stored in an unnamed Swiss vault.

Tether gold is also issued on the Tron blockchain as a TRC20 token.

Tether’s U.S.-dollar pegged stablecoin, USDT, is the most popular and successful stablecoin in the world despite its lack of transparency in almost everything.

It makes sense that some cryptocurrency investors might seek to readjust their portfolios and increase their exposure to gold, said Vetle Lunde, an analyst at Arcane Research.

“Gold-backed tokens are very convenient tools for investors who want to be invested in crypto and gold,” Lunde said. “The gold tokens are listed on some of the most liquid market places in crypto,” including Binance as well as rival exchanges like FTX, Bitfinex and Kraken, he noted.