Cryptocurrency has the potential to be an adept financial tool. But for investors, a volatile market equals a huge investment risk. Gold-backed cryptocurrencies not only reduce the risk of losing your investment, but diversifies your investment portfolio so you can plan for the future with confidence.
The acceptance of cryptocurrencies in the last few years, especially Bitcoin, has seen a rapid increase in the valuation of digital currencies. The significant upturn in the market has hooked major players and turned the heads of numerous financial institutions. Not only are investment bankers ready to take cryptocurrency seriously, the value of Bitcoin has even been floated on the global stock market.
Emerging cryptos such as Litecoin, Ethereum and others are in hot pursuit. The interest around digital currencies has created an investment frenzy that investors and crypto start-ups are seeing significant gains. Japan even passed a law earlier this year to legalize Bitcoin.
However, there remains a significant chink in the cryptocurrency armor that has not been addressed — the lack of a trustworthy guarantor. The problem here is that cryptocurrencies are backed by a process that has its own value. However, there is no guarantee that this value will be able to stand the test of time amid financial upheavals and the potential for government legislation that could throttle the market.
Cryptocurrencies are backed by the ‘mining’ process where crypto ‘miners’ invest time in solving mathematical, algorithmic problems that eat up a lot of power, hardware that runs 24×7 and other costs that go into helping create an individual coin. However, there are some issues with this process.
First of all, it is feasible that sophisticated hackers can infiltrate a Blockchain using malware that infects all the computers on the network. This will destroy the Blockchain and damage the value of tokens. The entire ledger of records might even be destroyed.
Whilst data on who wields how many coins may be recovered through personal backup measures, a crypto-crash will create discrepancies over the actual value of the cryptocurrency in question – leaving the value open to manipulation or the company having to start again from scratch.
Although we appreciate all cryptocurrencies have a robust science and advanced technology to back them up, having an intrinsic commodity like gold to back up digital currencies is a far safer option of protecting the value of cryptocurrencies and the investment of stakeholders.
Let’s use fiat currencies as an example. Traditional currencies are valued against by the US dollar thus subject to the highs and lows of the greenback. Numerous other factors can influence the value of fiats such as corresponding markets, politics and even natural disasters. This emphasizes the need to implement a robust model as back up for any monetary system.
Gold has been a wall of trust that has helped currencies build value for thousands of years. But how does gold accomplish stability when it has a volatile nature of its own?
In Gold We Trust. And Here Is Why?
Undependable commodities are backed by gold, which is the one and only guarantee that traders trust. And there is a good reason why we trust gold so much. For investors gold is a safe haven. When the markets take a turn for the worse, investors turn to gold to protect the interests of their clients and their firm.
Throughout the ages, gold has always been considered a precious metal that was not used generously for making tools and implements in the same way as tin, iron or copper. The form and rarity of gold rendered it as a metal for the elites of society, a metal of luxury that was used in ornaments and jewelry.
This rare characteristic rendered gold a valuable asset across continents, civilizations, and epochs, created an intrinsic value that couldn’t be negotiated. This essentially shows us that gold’s intrinsic value which is itself backed by thousands of years of trust by humanity as a whole.
When you back up a cryptocurrency with gold, it creates a monetary system that combines the best archaic guarantor with hi-technology of the modern age. History proves it is always better to have commodities backed by gold, but without a doubt the world needs an improved financial system that protect investments and the cost of living.
Since the US abolished the gold standard, fiat currencies are supported by the faith of the community in the same way that gold is. Yet whenever, the economy rocks, gold is the investment that is trusted the most. When financial markets are bullish, traders are confident they can sell their gold and invest in other commodities.
How Well Does Cryptocurrency Technology Gel With A Robust Gold Backing?
So how does gold provide a cryptocurrency with a robust backing? Fiat currencies that were previously backed by gold show us how stable they can be, even during times of volatility. Even America’s Federal Reserve used to hold a gold standard before it went all bad in the early 1970s.
If fiat currencies can do it, so can cryptocurrencies. And here’s why:
- Less Price Volatility:
Price volatility puts a currency, and it’s stakeholders at risk. Especially during unpredictable times such as wars, disasters or when bubbles burst. Gold, on the other hand, goes up in price because traders recognise precious metals as an economic safe haven.
Although gold’s value will drop when the markets are healthy, it always bounces back and keeps growing at a steady rate. This is what makes the difference. When you back currency with something like the US dollar, it will inevitably slump. Gold, on the other hand keeps currency stable.
- High Liquidity:
Cryptocurrencies backed by gold can also be redeemed as they can be converted into the gold they are backed up with and in turn converted into cash. Cryptocurrencies that are gold backed have a physical equivalent which the owner can decide to store in a safe place.
Similarly, a cryptocurrency backed by gold can also be paid in gold for transactions that are high in volume.
- Scarcity Builds Real Value:
A scarce source code, coupled with the intrinsic value of gold creates an even rare value for this cryptocurrency. Therefore, there is an assurance that the number of ‘coins’ in this cryptocurrency is always going to be limited and hence cannot be subjected to manipulations and inflation, thus keeping it ‘real.’
Any cryptocurrency that is backed by gold is the best investment you can make – especially when it comes to funding businesses and start-ups. Cryptocurrency can fall as fast as it rises. Therefore, when a start-up receives a backing from any cryptocurrency, there is always the possibility of having to fall back on lower exchange rates and face slow funding.
However, when your cryptocurrency of choice is backed by gold, you can be sure that there is going to be a steady flow of funding.
Find out about the benefits of gold-backed cryptocurrencies in our whitepaper.