Investors Cling to Gold-Backed Cryptos, Following Massive Market Crash

Sujha Sundararajan

A recent Goldman Sachs prediction on gold prices states that the precious metal could hit $2,300-$2,400, showing bullish sign throughout this year.


In this article:

Key Insights:

  • The recent crypto sell-offs have diverted investors to commodity-backed cryptos like gold.
  • Some gold-pegged cryptos to watch for investments include PAXG, XAUt, and DGX.
  • Gold price estimates by experts are bullish in 2022.

On May 7, TerraUSD (UST) stablecoin, which is supposed to maintain a $1 peg, started to wobble, and the price of the then-$18-billion algorithmic crypto crashed to as low as 35 cents on May 9. The Terra (LUNA) network witnessed a catastrophic failure within days.

For Sam, it was a $5000 worth of loss of his savings, and he is still struggling to recover from the nightmare. For now, nobody can predict how deep this plunge could be and whether it might bounce back to its 1:1 dollar peg.

Alternatively, Investors are eyeing alternative “safe-haven” assets such as gold-backed cryptos as a possible ray of hope after the terrible loss.

Its glittering gold, as bitcoin disappoints

With the recent geopolitical tensions and crypto sell-offs, bitcoin (BTC) became extremely fragile, crashing below the $28,000 level and bringing down stock prices. The world’s largest crypto by market cap is struggling to catch up above $30,000.

As a result, investors are fearful about re-entering the crypto market despite its higher returns in the past. Investors rather do not want to take any risks and look into newer variants of stablecoins backed by real-world commodities such as gold.

According to Everett Millman, a chief market analyst at Gainesville Coins,

“One of the main concerns that a lot of people who are new to crypto have is that it’s not backed by anything. It just gets on a screen. So attaching them or linking them to a real-world commodity, it does make some sense.”

Some of the gold-baked projects have promised stability to investors on the crypto front and have kept up to their word. 

For instance, Paxos Gold (PAXG), a digital token backed by physical gold, offers its investors, not just the tokens but also the underlying physical gold, which the parent company stores in vaults.

Tether Gold (XAUt) token also gives investors direct exposure to the physical gold price. It provides accessibility to ETFs and other traditional financial assets too.

Other gold-backed cryptos such as DigixGlobal (DGX), Meld Gold by Algorand (ALGO), and GoldCoin (GLC) have also evolved widely over the years.

Are these tokens a way forward?

It has been proved that gold is a protective hedge against inflation and a better alternative for crypto lovers who wish to invest in a stable and safer option when compared to fiat-pegged stablecoins.

Experts like Timothy Ord, President, and Editor of The Ord Oracle, predicted that gold stocks could see 10X gains in the next three years. Additionally, Wall Street gold estimates are also bullish for 2022.

Analysts at Goldman Sachs have recently hiked their forecasts for gold prices, predicting that the metal would hit around $2,300-$2,400 an ounce, up from $1950 previously.

Daniel Briesemann, an analyst at Commerzbank, told a publication,

“Gold is still in considerable demand as a safe haven, as evidenced by persistently high ETF inflows.”

Gold is a fully fungible asset and a globally recognized store of value, making the precious metal an ideal choice for tokenization.

On the downside

The fact that they are commodity-derived products doesn’t mean they are exempted from risks. For instance, their redemption process isn’t always smooth. Additionally, investors don’t necessarily have direct ownership over the gold that their tokens are pegged to. But this could differ in certain tokens which allow physical redemptions.

Another risk with gold-pegged digital currencies is that these tokens introduce the concern of storing a large supply of physical gold. As a result, investors should be careful to examine where the gold is housed before investing. Because if the value of gold disappears for any reason, the token value loses its value.

It is essential that there is transparency between crypto developers, investors, and third-party holders of gold, to build investor trust and maintain the stability of the digital token.

However, although gold-backed coins are still a small component of the pegged cryptocurrency market, USD-backed stablecoins remain a much larger part of the ecosystem. With the current crypto turmoil and the ongoing geopolitical tensions, gold-backed cryptos might change the order.

About the Author

Sujha Sundararajan is a writer-journalist with 7+ years of experience in Blockchain, Cryptocurrency and in general, FinTech news reporting. Her articles have featured in multiple journals such as CoinDesk, Protos, Bitcoin Magazine, CCN, Asia Blockchain Review, BeInCrypto and EconoTimes to name a few. She holds a Master’s in Journalism from the Indian Institute of Journalism and New Media and is also an accomplished Indian classical singer.

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