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Explained: What are gold-based stablecoins; why are they outdoing other cryptos

Explained: What are gold-based stablecoins; why are they outdoing other cryptos

Explained: What are gold-based stablecoins; why are they outdoing other cryptos
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By CNBCTV18.com Mar 1, 2022 7:31:05 PM IST (Published)

The Russian invasion of Ukraine has pushed investors towards gold-based stablecoins, which are crypto tokens backed by a real world amount of gold that is usually held in reserves, banks or third party financial institutions.

Global inflation and geopolitical tensions are leading to the rising popularity of gold-backed stablecoins. The Russian invasion of Ukraine, and the prevailing inflationary headwinds have caused these gold-backed digital currencies to outperform the wider cryptocurrency market, which has had a rocky year so far.

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What are stablecoins?

Stablecoins are cryptocurrencies backed by real-world assets such as commodities, fiat currency (issued by the government), gold, or sometimes other cryptocurrencies. Stablecoins are named so because the value of stablecoins changes based on the underlying asset, currency, etc.

This leads to lower volatility when compared to other cryptocurrencies like Bitcoin. The price function is closely made to mimic the value of the underlying asset through computer algorithms that function on its blockchain. Most stablecoins are made on the Ethereum blockchain and exist as ERC-20 standard tokens, with the backing being held in banks or third-party institutions.

The biggest stablecoins are the USD Coin (USDC), which is not affiliated with any government of CBDC just to be clear, and Tether (USDT). The two stablecoins are linked to the US Dollar, and are two of the biggest cryptocurrencies in the world by market cap.

What about gold stablecoins?

Gold stablecoins are those backed by an amount of gold. Each token, or fraction of a token, represents an equal real world value in gold. Investors are even able to receive the serial number of the physical gold bar that backs their holding of the stablecoin, in cases of reputed coins.

Gold stablecoins are witnessing an incredible jump in their popularity as a result of the ongoing conflict in Eastern Europe and the inflationary headwinds that have made holding piles of cash risky.

Tether gold (XAUT), the largest gold-backed stablecoin and the same Tether behind USDT, has seen a 300 percent increase in its market cap since January 2021. At the same time, PAX Gold (PAXG), which is the second-largest gold-backed stablecoin and developed by the same people behind USDC, has seen a 400 percent jump in its market cap in the same time period, according to data from CoinGecko.

Their growth has far outpaced the rest of the cryptocurrency market due to their lack of volatility and ease of getting into.

“Many investors are looking to get involved with the volatile crypto asset class, and gold-backed tokens provide some protection against volatility. Gold-backed tokens could continue to see massive appeal as gold’s outlook for the year improves,” Edward Moya, senior market analyst at the foreign-exchange brokerage Oanda told CoinDesk.

They also provide a convenient way to invest in gold for many investors, though any other real world utility still remains mostly theoretical. This easy access to gold investment possibly explains their sudden popularity. Gold has been known to attract investors in times of global uncertainty. With the inflationary pressures still in force, the Russian invasion of Ukraine intensifying, and COVID-19 still not fully eradicated, uncertainty seems to be a theme for the coming few months.

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