Going for Gold?
A Research Primer on Gold-Backed Crypto Tokens
The investment case for gold, an analysis of gold-backed tokens compared to other ways of owning gold, and gold vs bitcoin.
The PDF version of this primer lives in Google Docs here.
With the current COVID-19 crisis, and unprecedented monetary and stimulus response, many investors have turned their attention towards hard assets such as bitcoin and gold. Over the last twelve months since April 2019 the price of gold is up approximately 35%. Given the current financial uncertainty many analysts are forecasting that gold will set a new all-time high.
Alongside growing demand for gold, interest in gold-backed digital tokens, which can be transacted and stored on cryptocurrency exchanges and wallets, has also grown of late. Since September 2019 a number of new gold-backed tokens have been issued from established crypto companies, such as Tether, Paxos and Blockchain.com, and the total value of gold-backed tokens has grown by over 16x in the past year to more than $160m in value.
The purpose of this research report is to provide a brief overview of the general investment case for gold, both as a standalone investment and alongside cryptoassets prized for their algorithmically governed scarcity, such as bitcoin (BTC). The report also provides an overview and comparison of the leading gold-backed digital tokens.
- Gold-backed tokens offer numerous advantages over traditional gold: 24/7 transaction availability, improved transferability, ease of usability (via internet), and low cost of ownership
- Size of gold-backed token market up more than 16x in last year: three new gold-backed tokens have led the combined sector value from less than $10m to >$160m; there are now at least eight gold-back tokens in circulation
- Three gold-backed tokens currently dominate: Tether Gold (XAUT) $87m market value, PAX Gold (PAYG) $44m market value, and DGLD¹ (DGLD) $25m market value together currently make up 94% of gold token total category market value
- Significant differences exist across gold-backed tokens such as measurement/peg to gold, cost of ownership and use, blockchain platform choice, storage location of gold backing the token, and options for converting the token into physical gold
- Overall, gold-backed tokens complement both traditional ways of owning gold and pure cryptoassets like bitcoin: gold-back tokens do not wholly replace reasons to own physical gold, and if an investor owns pure digital assets such as bitcoin (BTC) as a hard asset they should also in our view carefully consider gold
The ancient and eternal allure of gold
Gold has one of the longest, if not the longest, track records of use as a store of value and medium of exchange. The archaeological record is not entirely clear on when humans first discovered and began using gold as jewelry and for other purposes, but one of if not the first use of gold as a monetary instrument is known to have emerged in the Kingdom of Lydia (located in Turkey) around the sixth century BC.²
Much has been written through the centuries about the use of gold as a store of value, monetary asset, and general object of desire. Rather than recount this rich and interesting history, this report will focus on the modern investment case for owning gold in different forms, as well as how gold compares to pure cryptoassets like bitcoin.³
Beyond its wide global use in jewelry and other activities (e.g. dental work, electronics, as an industrial metal), much of the investment case today for gold revolves around its historical role as a hard asset and store of value. These properties are illustrated by how gold’s price often rises in times of economic, financial and political turbulence. For example, during recessions gold has tended to appreciate in value (Figure 1). During major wars gold’s price appreciation has often been even more dramatic. Gold is often referred to as the ultimate “safe haven” asset.
Figure 1: Hard assets like gold have often performed well during economic downturns and periods of financial instability.
Central banks and gold
In addition to its traditional role as a hard asset and safe haven, today gold is widely held in significant quantities as a reserve asset by many of the world’s governments, central banks and multilateral institutions (Table 1).
Of the estimated 190,000 tonnes of gold ever mined, approximately 35,000 tonnes (18%) is held today by public sector institutions.⁴ For some countries, such as the United States, this is simply a legacy of the gold standard and Bretton Woods era, where currencies were linked and convertible into gold, a practice which ended for the US dollar in 1971. Since US President Richard Nixon took the US off the gold standard in 1971 the US dollar has declined in value against gold by 98% (gold has appreciated from $38/oz to approximately $1,700 as of April 2020).
Since US President Richard Nixon took the US off the gold standard in 1971 the US dollar has declined in value against gold by 98%
Table 1: Reported Gold Holdings — Top 20 Countries and Institutions (April 2020)
However, in recent years, many governments and central banks have been increasing their gold holdings, including some of the largest and fastest growing countries like China, Russia, India, and Turkey.⁵ Countries do not always publicly disclose the reasons for why they add, dispose or move gold.⁶ However, some of the demand for gold from countries such as Russia appears to be driven by a desire to diversify reserves away from the US dollars and Treasuries, the world’s dominant reserve assets.
Gold’s wide ownership by central banks is one of its most important distinctions compared to bitcoin
The decline in dominance of the US dollar has been a subject of immense discussion and debate for some time amongst gold owners, macroeconomists, and others.⁷ While the likelihood and timing of such an event is beyond the scope of this research report, should such an event occur gold is viewed as one of the potential beneficiaries of a new monetary regime.
For an investor comparing bitcoin and gold, the wide and growing ownership of gold by central banks and governments marks a potentially crucial distinction. While gold gains added legitimacy from central bank ownership, it also arguably makes it much more likely that gold would be prioritized over bitcoin in any future new monetary system (e.g. Bretton Woods II) that required anchoring to a hard asset. Indeed, in 2010, during the early aftermath of the Great Financial Crisis, some policymakers such as World Bank President Robert Zoelick proposed a return to a gold-anchored monetary system.
History and market overview of gold-backed digital tokens
The effort to create an exchangeable electronic representation of physical gold dates back to at least 1995 to the infamous E-Gold network, which was shutdown by authorities over money laundering violations. While not intended to be backed by actual gold, the name of a proto-bitcoin cryptocurrency design published in 2005 by Nick Szabo called “Bit Gold” took some inspiration from the scarcity of gold. Following the launch of bitcoin in January 2009, Bitreserve (now Uphold) was perhaps the first cryptocurrency company to create a way to exchange bitcoin for gold in late-2014.⁸
One of the first relatively decentralized gold-backed tokens was conceived by Singapore-based Digix in 2014, which sought to put “gold on a blockchain”. The Digix gold-backed token (DGX) has served as a broad template for the many subsequent gold-backed tokens that have been launched:
- Token pegged to a specified quantity of gold: each cryptocurrency token represents some pre-defined quantity of gold (eg 1 fine troy oz of “London Good Delivery” gold) secured in a physical storage location
- Physical backing gold held by third-party custodian: gold reserve country location (and sometimes the specific vault location) are disclosed by the issuer; gold reserve storage locations often in the world’s major gold markets (eg Switzerland, London)
- Token linked to specific gold bars and redeemable for physical gold: individual crypto tokens can be tracked online against specific physical gold bars held in storage; tokens can be exchanged for physical gold in certain locations
- Leverage existing blockchains for security and network effects: the cryptocurrency token operates atop an existing blockchain network, most frequently Ethereum as an ERC-20 token, enabling crypto wallet storage, transfer and exchange support
- Micro-ownership of gold supported: the greater number of decimals places supported by by tokens (up to 18) allows for ownership of very small quantities of gold
- Token trades on cryptocurrency exchanges: allow for the trading of gold-backed tokens at exchange rates that closely follow gold’s spot price
- Fee-based business model: various fees are charged by the token issuer to help cover the costs associated with managing the gold-backed token and storing physical gold, including transaction, issuance, redemption, storage, etc.
It was only in the last year when the total value invested in gold-backed cryptoasset tokens grew substantially, up more than 16x in value, from less than $10m in combined value last year to over $160m as of April 2020. Some of the advantages of gold-backed tokens vs traditional financial instruments and physical gold are summarized below (Table 2).
Table 2: Gold Ownership — ETFs/Futures vs Physical vs Tokens
Some additional advantages of gold-backed tokens over the major traditional means financial market investors can gain exposure to gold are also summarized in Table 3.
Table 3: Gold Ownership Comparison
Today, three gold-backed tokens currently dominate: Tether Gold (XAUT), PAX Gold (PAYG) and DGLD (DGLD), which together currently make up 94% of total market value of all gold-backed tokens (Table 4).
Table 4: Overview of Leading Gold-Backed Digital Tokens: XAUT, PAXG, DGLD
The leading gold-backed tokens are similar in that they all allow for exchange of the token for physical gold, although the manner and cost of doing so differs substantially. Other differences include regulatory status, technology platform, cost of ownership, exchange/redemption requirements, and other factors summarized in each token’s respective full data profile contained at the end of this report. The different token issuer fee structures are particularly important to examine closely to ensure that the way you intend to use the token (eg long-term hold vs. frequently transact) is in alignment with the token’s fee structure.⁹
While tokenized gold holds a number of advantages, as we discuss next there are scenarios where owning physical gold may be preferable to tokenized gold (eg cyber security risk).
Gold vs bitcoin
From an investment perspective, gold shares a number of attractive attributes with bitcoin and other hard cryptoassets (Table 5). Indeed, these similarities have led to many referring to bitcoin as “digital gold”, and recently a number of prominent crypto fund managers and investors have mentioned significant gold holdings alongside their bitcoin, including Ari Paul and Arthur Hayes.
Table 5: Similarities between Gold and Bitcoin
Like bitcoin, gold can be owned entirely outside of banks and the traditional financial system. While financial products such as gold ETFs have grown in popularity in recent years, there is also a large market and range of institutions, including government run mints, that supports physical gold ownership. Physical gold ownership can in some ways be likened to holding cryptoassets in non-custodial wallets. Both gold and bitcoin can be owned outside of any intermediary or third party, residing in the sole possession and control of the actual owner.
The physical and virtual nature of gold and bitcoin, respectively, makes them more complimentary
The most fundamental difference between bitcoin and gold is their virtual and physical nature, respectively.
Bitcoin is entirely digital. It is created using computer code and only exists “on computers and the internet”, so to speak. In contrast, gold is one of the just over one hundred fundamental chemical elements that form the primary constituents of matter and cannot be broken down into simpler substances. From this fundamental physical-digital difference springs a number important distinctions, potential advantages and trade-offs, between gold and bitcoin (Table 6).
Table 6: Gold vs Bitcoin — Advantages/trade-offs arising from Physical vs. Virtual nature
While the above table attempts to highlight advantageous characteristics for bitcoin and gold, particularly from a use and store of value perspective, it is important to note a number of limitations with this exercise.
First, any generalization of advantages across different people and institutions is inherently problematic given differences in circumstances and preferences. For example, crime and risk of theft varies across geographies and personal circumstances, making any physical security generalization problematic. We have therefore chosen not to indicate an advantage for either bitcoin or gold for physical security.
If an investor owns pure digital assets such as bitcoin (BTC) as a hard asset they should also carefully consider gold
Second, this table does not weigh the relative importance of different advantages, and the importance of some advantages may vary over different geographies and periods of time. For example, some countries have shown a willingness to shut-off internet access, an act which effectively renders cryptocurrency impossible to use and thereby negates bitcoin’s transferability advantage.
Looking at total supply, at first glance this characteristic might appear to favor bitcoin given its finite and knowable supply. However, because bitcoin has only been in existence for just over 11-years some would argue that the social consensus and technology that secure bitcoin’s finite supply have not received a sufficient test of time compared to something like gold, which has proven immune to efforts by alchemists, etc. to inflate its natural supply.¹⁰
Finally, a number of gold vs bitcoin dimensions are not included in this comparison, such as environmental impact, a heavily debated topic. Concerns over both have been raised, but we are not aware of any authoritative analysis comparing the respective environmental impact of gold and bitcoin.
Gold vs bitcoin: other differences and characteristics
Bitcoin and gold can both be traded and accessed via different financial instruments and markets, and we compare the two across a number of financial market dimensions in Table 7.
Table 7: Gold vs Bitcoin — Financial Market Dimensions
As with the previous comparative table, no attempt has been made to weight any of the above financial market characteristics as their respective importance will vary across individuals and institutions. For example, all cryptoassets are combined ~$200 billion whereas the size of the gold market is at least an order of magnitude greater, meaning than many institutional investors simply see cryptoassets as too small to invest in at present. Gold is also a more mature asset with regulatory clarity compared to bitcoin, meaning that investing in bitcoin may simply not be an option for many institutional investors at this stage.
One of the main concerns often expressed around bitcoin is its extraordinary volatility relative to gold and other financial assets (Figure 2). While it is true that bitcoin is substantially more volatile than gold and most other currencies and financial assets, outsized volatility is not always a disadvantage. Overall, outsized volatility has played a positive role to date in the growth of cryptocurrency use and adoption. Volatility helps boost liquidity and fund development of critical infrastructure, such as cryptocurrency exchange “on-ramps”.
Figure 2: Volatility — Gold vs Bitcoin vs Fiat Currency
There are numerous other points worth considering when comparing bitcoin to gold including:
- bitcoin arguably faces more direct replacement competition than gold faces as a reserve asset
- gold is owned for “legitimate” purposes that would be socially and politically difficult to justify complete confiscation (eg wedding jewelry), but restrictions on gold ownership have been implemented by governments in the past in countries such as the US
- investment preferences expressed by younger generations would appear to bode well for cryptoassets as compared to some traditional asset classes
Hard assets have historically performed well during times of crisis and periods of financial instability, and both gold and bitcoin offer a number of compelling and complementary characteristics.
Gold’s historical track record, physical nature, and wide ownership amongst central banks and governments are its standout characteristics. Tokenized gold is attractive for a number of reasons, including 24/7 access, ease of transferability, cost, and overall convenience of use compared to traditional gold ownership options. Rather than completely replacing other traditional means of gaining exposure to gold, tokenized gold offers a complementary and exciting new way to access and transact with the world’s ultimate safe haven asset.
 The launch of DGLD was announced in October 2019 by a commercial consortium comprising CoinShares, Blockchain.com and MKS (Switzerland) SA. Blockchain.com maintains an ongoing commercial interest in the distribution of DGLD.
 While today many countries are either growing or maintaining their gold holdings, this was not the case in the 1990s. For example, the United Kingdom showed disastrous timing when at the turn of the century Gordon Browne sold half the UK’s gold holdings at the bottom of a two-decade bear market (~$200/oz.). Other countries including Canada, Belgium, Argentina, Australia, the Netherlands and Switzerland also reduced gold holdings around this time.
 Questions about motives arose when Germany repatriatiated 583 tonnes of its gold stored at the Banque de France and the Federal Reserve Bank of New York.
 See for example Barry Eichengreen on the US dollar’s “Exorbitant Privilege” (video)
 Other early gold-backed token efforts include a high-profile aborted collaboration between CME, the UK Royal Mint, Bitgo and other partners
 See for example this analysis from last year of PAXG’s fee structure under different use and position size scenarios https://sci.smithandcrown.com/research/understanding-paxos-gold-stablecoin
 In addition, the seeming advantage of finite supply could work against bitcoin in certain scenarios, such as consideration by monetary authorities as an anchor hard asset for a new monetary system (Bretton Woods II). Gold’s potential growth of supply into perpetuity could make it more attractive as a base monetary asset to economic policymakers than something like bitcoin with a fixed supply as it would be relatively less deflationary. We therefore chose to rate both bitcoin and gold equally on total supply, although our forecast is that over time bitcoin may show a more clear advantage in this category from a store of value perspective.
Disclaimer and Disclosures
Notice: This document is intended for high-level information purposes only. The views expressed in
this document are not investment advice nor recommendations. The facts contained herein are not necessarily complete and recipients of this document should do their own due diligence, including seeking independent financial advice, before investing. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein. This document contains forward-looking statements, which Blockchain may not update publicly and may not prove accurate. They are provided solely as indications of portions of Blockchain’s internal strategic planning. The individuals contributing to the report have positions in some of the assets discussed.