One of the common complaints about Bitcoin and similar cryptocurrencies is the fact that they are unbacked by any assets. Their value is purely in the eye of the holder. If the whole world were to suddenly demand another type of currency, the value of cryptocurrencies would plummet. But in that sense cryptocurrencies really aren’t any different from existing government-issued fiat currencies.
Some companies have tried to overcome that supposed disadvantage of being unbacked by issuing stablecoins, blockchain-based cryptocurrencies that are backed by fiat currencies or short-term fiat-denominated debt securities. But those stablecoins have their drawbacks too, most notably the trust problem. Investors have to trust that the stablecoin issuers actually have the assets to back their stablecoins, otherwise the fractional reserve house of cards could come tumbling down.
Other entrepreneurs have sought to combine cryptocurrency with a more traditional form of backing: gold. And with the rush to safety as a result of the coronavirus-driven economic crisis, gold-backed stablecoins are seeing an increase in demand.
Gold-backed cryptocurrencies suffer from the same problem that fiat-backed cryptocurrencies suffer, that of trust. But as they claim to allow investors to take delivery of the gold that backs them, unlike other gold investments products such as exchange-traded funds (ETFs), they offer some advantages in that respect.
The major drawback today is that physical gold of any type is becoming increasingly difficult to come by. Demand for gold has risen so much, especially for gold coins, that many dealers are sold out. The ability, or rather inability, to purchase gold to back gold-backed cryptocurrencies will ultimately be the limiting factor in those cryptocurrencies being able to multiply. At some point they won’t be able to add any more gold to their holdings, and no more of those gold-backed cryptocurrencies will be able to be issued.
Of course, that isn’t too dissimilar to Bitcoin, whose supply is limited to 21 million bitcoins. Once that limit is reached in the future, no more bitcoins will be mined, and prices will be set solely by investor and consumer demand. While with gold-backed stablecoins the limit on price growth will be determined by the price of gold, which gains slowly and steadily, with Bitcoin and similar cryptocurrencies there is greater potential for long-term gains, making them a great choice for cryptocurrency investors looking for wealth appreciation.
Still, gold-backed cryptocurrencies could make inroads into the stablecoin market, and provide a secondary alternative to Bitcoin and similar cryptocurrencies. Not only could cryptocurrency IRA investors invest in Bitcoin, Litecoin, Ethereum, and others for long-term wealth appreciation, they could also invest in gold-backed cryptocurrencies for hedging, portfolio diversification, and stability. That could make the coming era of cryptocurrency investment quite bright indeed.