Gold’s (GC=F) rise to all-time highs this year has sparked a growing appetite for tokenized bullion as investors look for ways to participate in “debasement trading,” but on blockchain.
The precious metal issued in token form uses the same technology that underpins cryptocurrencies, with guarantees from the issuer that the tokens are backed by securely held physical gold and designed to accurately reflect the price of gold.
As gold hit new highs in October, stablecoin issuer Tether saw up to a 60% increase in the value of its gold tokens (XAUT). Tether noted that XAUT’s market capitalization jumped from $1.44 billion at the end of last quarter to nearly $2.1 billion last month, before the gold sell-off.
Tokenized gold currently represents only about 1% of the overall real-world asset market. While stablecoins backed by US dollars or short-term Treasuries boast a market capitalization of around $300 billion, tokenized gold accounts for only around $3 billion, led by Tether’s XAUT and PAX gold.
Read more: Are you thinking of buying gold? Here’s what investors need to keep in mind.
“It’s really an alternative way that people can hold gold if they prefer to keep it in a (digital) wallet,” WisdomTree head of digital assets Will Peck told Yahoo Finance. “They can exchange it 24/7, 24/7, peer-to-peer transferability.”
Another benefit is the potential use as collateral for loans.
“There is a continued debasement of the US dollar,” said fintech firm Firepan CEO Ian Kane. “Being able to take gold, borrow against it, have that capital where my loan actually generates an additional return, and not have to worry about my principal being degraded or devalued, that becomes really compelling.”
While tokenized gold can theoretically be redeemed for physical gold or traded like any other cryptocurrency, Peck sees it being used in a similar way to bitcoin (BTC-USD), with both assets coexisting as ways to hedge against inflation.
“Both gold and bitcoin have fared well in a world of rampant money printing. They serve different but complementary roles as structurally deflationary assets,” Peck added.
In the United States, the push for tokenization has gained momentum alongside new legislation this year that spurred a rise in stablecoins, or digital tokens pegged to the U.S. dollar.
The crypto industry, along with Wall Street heavyweights, wants to bring the trend to the mainstream. Robinhood (HOOD) CEO Vlad Tenev recently compared tokenization to a “freight train” that cannot be stopped. BlackRock (BLK) CEO Larry Fink said in a company newsletter over the summer that the concept will “revolutionize investing.”
