8 August 2020
Gold-backed cryptocurrencies allow investors to buy, sell, and store gold without the hassles that usually accompany it. Cryptocurrency users who wish to diversify into precious metals often find these tokens to be more convenient than traditional gold-investing methods.
In this article, we’ll explain the benefits of gold-backed crypto over other methods of gold-based investing. And we’ll compare and contrast the four most popular gold-backed cryptocurrencies: PAX Gold (PAXG), Digix (DGX), Tether Gold (XAUT), and Perth Mint Gold Token (PGMT).
For each gold-backed cryptocurrency, we’ll consider exchange availability, fees, minimum divisible amounts, and more.
Benefits of Gold-Backed Cryptocurrency
Before reviewing each token, we should first consider why investors might be interested in gold-backed crypto in the first place. After all, if an investor wants to buy gold, there are several traditional options available. They can choose to purchase retail bars and coins, shares of a gold-backed ETF, or allocated gold in a vaulting service such as GoldMoney.
But gold-backed crypto carries some distinct advantages over these other methods:
Easy to Sell and Withdraw
First, gold-backed crypto is usually far easier to sell and withdraw than retail bars and coins or vaulted gold. An investor can sell his gold crypto for ETH at a moment’s notice using a decentralized exchange such as Kyberswap. He can then send his ETH to his crypto broker and immediately receive cash for it through Paypal or ACH transfer.
Some crypto brokers even offer debit cards, making it even faster for an investor to spend the proceeds of his gold crypto sales. By contrast, selling physical gold bars and coins is fraught with difficulty. To sell coins, the investor must first package them and send them to his dealer. And he must pay for insurance to cover the coins in case they are lost or stolen.
After sending the coins in the mail, the seller must wait for the dealer to receive the coins, verify their authenticity, and then send him a check. Only then can the investor get access to the cash he needs from his savings. Vaulting services like GoldMoney and BullionVault make this process much easier. In this case, the gold is already in a vault held by the dealer. So the investor can immediately sell his gold and be credited with cash. However, the problem arises when the user tries to withdraw the cash.
In many cases, vaulting services have restrictions on withdrawals. For example, BullionVault holds the user’s cash for 90 days if he originally deposited it through ACH transfer. And if a user has less than $2,000 worth of metal in his account, GoldMoney only allows him to withdraw using expensive wire transfers. Gold crypto solves this problem by enabling the user to sell his gold to any buyer using an ordinary cryptocurrency wallet.
Available in Small Denominations
Second, gold crypto can be bought in denominations as small as 0.01 grams (approx. $0.54 worth at the time of this writing). By contrast, stock shares cannot be divided into fractions. So the smallest denomination is one share. Most gold ETF shares range in price from $16 to $158. Coins are even more difficult to buy in small denominations, with 0.1 oz. (around $168 worth) being the most widely sold small coin.
Most importantly, gold-backed crypto is far more convenient for crypto users than ETF shares or vaulting services. To buy an ETF share, a user must first open an account with a traditional stock brokerage. To buy gold through a vaulting service, the user must first open an account with the service itself. Either of these actions requires filling out onerous KYC/AML paperwork, uploading a photo ID, and dealing with other hassles.
By contrast, if a user has an account with a centralized crypto exchange already, he can usually purchase gold crypto from it – without having to sign up for a separate account. Or he can purchase it anonymously using a decentralized exchange and an Ethereum wallet. These are the advantages of gold-backed crypto over traditional methods of gold-investing. Now let’s consider some particular coins that are available.
Digix (DGX) is produced by DigixGlobal, a Singapore-based precious metals company. It is regulated by Enterprise Singapore under the Commodity Trading Act. Each Digix token is backed by 1 gram of gold. This gold is held in LBMA-approved vaults in Singapore and Canada. Users can audit DGX tokens using the company’s asset explorer, found on the Digix homepage
The smallest divisible amount of DGX is 0.01 tokens or 0.01 grams of gold. The simplest way to buy DGX is to use the decentralized exchange, Kyberswap. Over $18 million worth of DGX trades happen on Kyberswap each day. DGX also has high volumes on Tokenize, but U.S. residents may be unable to access it. Bitfinex and Uniswap offer DGX, but in very low volumes.
Because of concerns over U.S. financial regulations, DigixGlobal will not issue or redeem DGX tokens for U.S. residents. However, as noted above, the token does a high volume of anonymous trading on Kyberswap. DigixGlobal charges a fee of 0.13% every time the token is sent from one wallet to another. This fee is taken by the open-source smart contract that governs the token.
In addition, the contract allows for a storage fee of 0.6% per year to be charged. But the company has chosen to turn this fee off indefinitely. Users who wish to redeem tokens for physical gold will need a minimum of 100 tokens for a 100-gram gold bar or 1,000 tokens for a 1-kilogram bar. DigixGlobal charges a 1% recasting fee per bar redeemed. If all of the tokens being redeemed represent portions of the same gold bar, the recasting fee is waived.
The greatest advantage to DGX over other gold crypto options is its small denominations. Users can easily buy $5 or $10 worth of DGX at a time. However, there are two main disadvantages to DGX. First, some U.S. users may be turned off by the fact that they can’t directly redeem their tokens through DigixGlobal. Second, some users may consider DGX transaction fees to be too high.
PAX Gold (PAXG)
PAX Gold (PAXG) is produced by Paxos Trust Company, the same company that gave us the PAX stable coin. It is regulated by the New York State Department of Financial Services (NYSDFS). Each PAXG token represents 1 troy oz. of a 400 oz. London Good Delivery Bar held in a London vault. Tokens can be audited using the Gold Allocation Lookup Tool on the company’s homepage.
The smallest divisible amount of PAXG is 0.01 tokens or 0.01 troy oz. PAXG does over $4 million of trading on each of the following four exchanges: Binance, OKEx, BW.com, and Coinsbit. So there’s plenty of liquidity to go around. Paxos will also sell PAXG directly to users, including U.S. residents.
In addition, some liquidity is available for PAXG on the Uniswap decentralized exchange. Paxos claims that a storage fee is “not charged at this time,” but it is unknown whether the smart contract will allow the company to impose a storage fee at a later date. There is a 0.02% transaction fee per PAXG transaction. Paxos charges a “creation and destruction fee” any time a user wants to have tokens issued or redeemed. This fee starts at a minimum of 0.02 PAXG for small token amounts and rises to 0.025% of the total for 20,000 tokens or more.
Users who want to redeem tokens can choose from 3 options:
- Sell gold for fiat. In this case, Paxos will transfer the cash to the user’s bank account.
- Exchange the physical Paxos gold for gold credits (unallocated gold) in a Swiss bullion banking account. The name on the bullion bank account must match the name on the Paxos account.
- Have the physical gold delivered to an LBMA-approved vault in the United Kingdom
U.S. crypto users may prefer PAXG over competitors because it allows them to directly redeem tokens through the company. Disadvantages include the lack of denominations smaller than 0.01 oz. and low liquidity on decentralized exchanges.
Tether Gold (XAUT)
Tether Gold (XAUT) is produced by TG Commodities, Lmt. This company is associated with Tether Operations, creator of the Tether (USDT) stable coin.
Each XAUT represents 1 oz. physical gold held in a Swiss vault. While most other gold-backed cryptos are Ethereum tokens, XAUT is available in both Ethereum and TRON versions. XAUT is traded in very low volumes on Bitfinex and FTX. U.S. residents will not be able to get accounts with these exchanges. Although, TG Commodities does allow these tokens to be issued to U.S. residents directly from the company’s website.
XAUT has no storage fees. This is a primary feature mentioned in the Tether Operations Limited’s whitepaper, so future storage fees are unlikely. The company has not mentioned any transaction fee for the use of XAUT. However, TG Commodities charges a 0.25% fee for the creation or redemption of tokens. Users who want to redeem can choose to either sell their gold to the company for cash or pick up their gold at a vault location in Switzerland.
The chief advantage of XAUT is the lack of storage and transaction fees. The principal disadvantage is low liquidity in the secondary market.
Perth Mint Gold Token (PMGT)
The Perth Mint Gold Token (PMGT) is issued by InfiniGold, in cooperation with the Perth Mint of Australia. Each PMGT is backed by 1 GoldPass certificate, and each certificate represents one ounce of gold held by the Perth Mint. These certificates are guaranteed by the Australian government. They can be redeemed through a simple interface provided by the GoldPass Android or iOS app.
If a user wants to have PMGT issued to him, he must first link his GoldPass account and his Ethereum address to the official PMGT GoldPass account. Once this is done, he can transfer his GoldPass certificates to a special address for minting PMGT. The tokens are then sent to his Ethereum wallet.
Users generally cannot use fiat to buy PMGT. They must first buy GoldPass Certificates, and then use these certificates to mint PMGT. If a user wants to redeem his tokens, he does this by sending them to a special burner address. The certificates are then credited to his GoldPass account. If the user does not have his Ethereum address linked to a GoldPass account, the transaction fails.
GoldPass is available to U.S. residents and throughout the world. PMGT does a very small volume of trading on KuKoin. Other than this, it has almost no secondary market.
The chief advantage of PMGT is the reputation of the issuer and the ease with which it can be issued and redeemed. The Perth Mint is held in high esteem by many gold investors. So this is a chief selling point for the token. The chief disadvantage is the practically nonexistent secondary market.
Gold-backed cryptocurrencies present many advantages to gold investors. But competition between rival gold tokens continues to heat up. Only time will tell which one comes out ahead. In the meantime, crypto investors who are interested in gold should consider the benefits and disadvantages of each of these coins to determine which one is right for their individual needs.