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 take part in the “debasement trade,” but on blockchain.
The precious metal issued in token form uses the same technology that underpins cryptocurrencies, with issuer guarantees that the tokens are backed by physical gold securely held and designed to closely mirror the price of gold.
As gold soared to new highs in October, stablecoin issuer Tether saw as much as a 60% jump in the value of its gold tokens (XAUT). Tether noted that XAUT’s market cap jumped from $1.44 billion at the end of last quarter to nearly $2.1 billion last month, prior to the gold sell-off.
Tokenized gold currently accounts for just about 1% of the broader real-world asset market. While stablecoins backed by the US dollar or short-term Treasurys boast a market capitalization of around $300 billion, tokenized gold represents just about $3 billion, led by Tether’s XAUT and PAX gold.
Read more: Thinking of buying gold? Here’s what investors should watch for.
“It’s really an alternative way that people can hold gold if they prefer to hold it in a [digital] wallet,” WisdomTree head of digital assets Will Peck told Yahoo Finance. “They can trade it 24/7 around the clock, peer-to-peer transferability.”
Another benefit is the potential use as collateral for loans.
“You have a continued debasement of US dollars,” fintech startup Firepan CEO Ian Kane said. “Being able to take gold, take a loan against that, have that capital where my loan is actually generating additional yield — and not having to worry about my principle being debased 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 used in a similar fashion as bitcoin (BTC-USD), with both assets coexisting as ways to hedge against inflation.
“Both gold and bitcoin have done well in a world of rampant money printing. They serve different but complementary roles as structurally deflationary assets,” Peck added.
In the US, the tokenization push has gained momentum alongside new legislation this year that fueled a surge in stablecoins, or digital tokens pegged to the US dollar.
The crypto industry, along with Wall Street heavyweights, wants to bring the trend into the mainstream. Robinhood (HOOD) CEO Vlad Tenev recently compared tokenization to a “freight train” that can’t be stopped. BlackRock (BLK) CEO Larry Fink said in a company newsletter over the summer that the concept “will revolutionize investing.”
