What is a cryptocurrency backed by precious metals?
It’s a type of stablecoin, which have been gaining popularity in recent times due to their ability to maintain a less volatile range of value by being backed by other assets, in this case, precious metals.
Most cryptocurrencies, such as Bitcoin and Ethereum, have very high volatility. If you’re looking to use the benefits of a cryptocurrency without the risk of such high volatility, you can purchase a stablecoin. By having their value pinned to an underlying asset, the stablecoin’s value cannot fall below its value. However, its price fluctuates with the underlying asset price, including both its rises and its falls.
There are three basic types of stablecoin:
- Fiat-backed: a fiat-backed stablecoin is backed by the value of an underlying fiat currency, for example, the Japanese Yen. The most popular of these is a US Dollar backing. As the price of the underlying currency fluctuates, so too will the stablecoin.
- Commodity-backed: Gold, oil, and real estate are all examples of commodities used to back stablecoins. A commodity-backed stablecoin will have its value backed by one of these commodities. All precious metals are a type of commodity-backing, and each specific precious metal will have its own stablecoins.
- Cryptocurrency-backed: a cryptocurrency-backed stablecoin is perhaps the most confusing. A new stablecoin might back its value to a more established cryptocurrency such as Bitcoin to keep it stable.
Why might you want to invest in a precious metal-backed stablecoin?
There are two main reasons you might want a precious metal-backed stablecoin.
First, you might want to invest for all the reasons we have already mentioned that stablecoins are gaining popularity. Stablecoins resist the cryptocurrency market’s general volatility but maintain crypto’s transactional, privacy, and security benefits.
Second, with a precious metal backed cryptocurrency in particular, it’s backed by a commodity resistant to fiat currency inflation and market volatility. A gold backed cryptocurrency is one of the most popular stablecoins for its stability as a store of value. Of course, the precious metal itself will have its own kind of volatility. Still, many investors purchase gold, silver, and other precious metals because these tend to be the most stable store of value in the event of a market crash or inflation.
There may be other reasons, such as speculating that the value of a particular precious metal will be going up in the short or long term and wanting to invest in the metal through the convenient intermediary of a cryptocurrency.
Whatever your reason, stablecoins now take up a sizable chunk of the market for cryptocurrencies. Moreover, they seem to be here to stay as a way to invest in a less volatile form of crypto and a new way to invest in fiat currencies and commodities.
Is now a good time to invest in precious metal-backed cryptocurrencies?
There is a lot of fear around both an over-valued stock market and the possibility of inflation across North America and Europe at the moment, especially the U.S.
A precious metal-backed stablecoin is a hedge against both a stock market crash and high inflation and, therefore, may be a good investment in the current climate.
The additional investment benefit of purchasing a stablecoin over directly investing in the precious metal is the potential for the stablecoin itself to gain value over and above that of the underlying precious metal. Its base value will always remain at the underlying asset level, but it may rise higher than that if demand for the particular stablecoin rises.
Which precious metal should I invest in?
That’s going to come down to your investment strategy. Almost all precious metals are purchased because their value tends to remain stable, even in the face of market crashes and inflation. However, holding onto precious metals for the long-term has historically yielded less value than just owning stocks or bonds for most periods in history.
However, many people hold precious metals knowing that, because unlike stocks and bonds, they tend to remain more stable in price regardless of market conditions. This makes them great to back stablecoins if you are looking for one of the most stable assets to keep prices from fluctuating.
Gold tends to be more stable than silver and remains more liquid. On the other hand, silver has more industrial uses than gold and therefore can fluctuate more with the needs of the businesses.
Other options include platinum and palladium, which also have stablecoins attached to them. However, these markets are smaller than gold and silver and thereby carry more risk of instability.