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 increased 30-fold since the start of 2020, reflecting an increase in demand.
In particular, pax gold (PAXG), a token launched in September 2019 by New York-based stablecoin issuer Paxos under the ERC-20 standard of the Ethereum blockchain, has seen strong growth in recent months. Its market cap has overtaken that of tether gold (XAUT), another gold-backed cryptocurrency from Tether, the dominant issuer of stablecoin.
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Tether gold debuted in January 2020, and the two gold-backed stablecoins were in a tight race until May – around the time pax gold was listed on India-based exchange Wazirx, which is a unit of the cryptocurrency exchange giant Binance.
“India is home to the world’s largest gold trade,” Arcane Research said. “This could be the main 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 growing demand from investors and traders looking to hedge the risks associated with rising inflation and the highly volatile market for gold. cryptography.
The Bureau of Labor Statistics reported Thursday that consumer prices in the United States rose about 5% in the 12 months through May, the fastest pace since August 2008, as the economy reopens restrictions related to coronaviruses and that stimulus funds continue to flow. in consumer purchases and financial markets.
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Many investors have invested money in bitcoin over the past year, believing that it could serve as a hedge against inflation, a sort of “digital gold” so to speak. But the price of bitcoin has fallen over the past two months, changing hands to $ 36,525 at the time of publication, well below the all-time high of nearly $ 65,000 reached in April.
Gold futures have climbed around 4% over the past month and are currently trading at around $ 1,896 an ounce.
“If you are an institutional fund manager, when the market starts to get volatile and the crypto market starts to get volatile, you may need to allocate your portfolio to compensate for this to make sure you meet certain thresholds of. risk, ”Vogel said. in an interview with CoinDesk. “Therefore, gold tends to be, in times of high volatility, a very natural and excellent asset class in which to move forward and diversify.”
Binance accounts for the bulk of PAXG’s trading volume, according to data from CoinGecko.
Paxos and Tether said they see increasing demand from institutional investors for gold-backed stablecoins.
Over the past six months, according to Vogel, there have been more institutional investors buying Pax Gold directly from Paxos for “large orders.”
“Tether gold may appeal to institutional investors in the digital token space who wish to gain 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 physical gold itself because of its portability.”
PAXG and XAUT both claim to be backed by a 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 has stated that 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 world’s most popular and successful stablecoin despite its lack of transparency in almost everything.
It makes sense that some cryptocurrency investors are looking to readjust their portfolios and increase their exposure to gold, said Vetle Lunde, analyst at Arcane Research.
“Gold backed tokens are very handy tools for investors who want to invest in crypto and gold,” Lunde said. “Gold tokens are listed on some of the most liquid crypto marketplaces,” including Binance as well as rival exchanges like FTX, Bitfinex and Kraken, he noted.