Cryptocurrencies have evolved since their first appearance in global markets just over a decade ago. One of the major advancements was the creation of stablecoins, which add liquidity to crypto markets by backing tokens with other, less volatile assets. What started with a USD-backed stablecoin issued by the Bitfiniex exchange (USDT) has gradually moved to a model where hard assets (instead of fiat) are being used to back these digital currencies.

This article explains how gold-backed cryptocurrencies such as GoldCoin work and how they compare with other types of cryptocurrencies, including Bitcoin, altcoins, and other stablecoins.

How does gold-backed crypto work?

A cryptocurrency is a digital coin that is issued from a blockchain such as Ethereum or Bitcoin. Cryptocurrencies that are backed by gold have more stability than a token that is backed merely by a company’s brand or by automated market makers that boost its liquidity. When you buy a token backed with gold, you can redeem for gold at any time, so you have one of the world’s most valuable assets standing behind your token.

Not only that, you can use the digital representation of gold (the token) for trading, investing, and diversification. Each token can be divisible many times over, bought, and sold, all while the gold is kept safely in storage should you decide to redeem it.

Gold-backed cryptos enable people to invest in gold but in a much more liquid way, with more potential options to make money in trading and investing through the use of fractionalized shares of gold-backed tokens.

The best thing about gold-backed coins

Perhaps the biggest difference between standard cryptocurrencies and a gold-backed token is price volatility. Crypto markets are known for wild swings, which often cause damaging liquidations for margin traders and a general sense of uncertainty about where your crypto asset is going. Due to this volatile nature of the cryptocurrency market, trading bots provide ways to overcome issues in this realm. These bots work for you all day and night, strictly following your orders to perform various actions. For instance, people use DCA bots when trading crypto to Dollar Cost Average their portfolio.

With a gold-backed cryptocurrency, the price is pegged to a certain portion of gold. Now gold is not an asset where you generally see a lot of volatility, and demand and supply do not move in great leaps and bounds but rather in slow motion. That is why gold-backed cryptos are so vital for investors and traders, who depend on the low volatility to balance out their somewhat volatile crypto portfolios.

Gold-backed coins vs. Bitcoin

Bitcoin’s volatility is gradually getting better as its importance to investors of all stripes grows each year. But it was Bitcoin’s volatility that left a space open for Tether to introduce its fiat-backed stablecoin because, for many years, Bitcoin’s volatility was too much for most investors to stomach.

But now, with Bitcoin going parabolic, transaction costs are getting higher, and confirmation times are getting slower. A gold-backed digital currency works on a public blockchain and will not have the demand that Bitcoin experiences, so network and transaction fees are usually much lower.

How do Altcoins hold up against digital gold currencies?

Outside of Bitcoin, there are thousands of alternative cryptocurrencies called “Altcoins”. Ethereum is the leading crypto after Bitcoin, plus thousands of ERC-20 tokens have been issued from the Ethereum Blockchain. Some altcoins are issued off other blockchains but the majority of cryptos listed on CoinMarketCap today are living on Ethereum.

The Ethereum smart contract platform has made it rather easy for developers and startup teams (and anyone else) to buy Ethereum and issue their own cryptocurrency. This, of course, has led to a lot of “fluff” projects that feature high volatility and low liquidity – a death sentence for a crypto token.

On the other hand, digital currencies backed by gold have the opportunity to enjoy the liquidity of gold and stablecoins at a much lower rate of volatility.

Gold-backed vs. fiat-backed stablecoins

Having a stablecoin that is backed by the USD, as with Tether, means the investment is always correlated with and redeemable for US dollars. Unfortunately, the USD has been pumping out additional dollars like there’s no tomorrow, and the value of the USD is in jeopardy due to rampant quantitative easing.

Gold itself is a highly valued asset because it is inversely correlated with USD, meaning when the USD price goes down, gold price rises, and vice versa. That’s why a gold-backed cryptocurrency is so important in providing traders and investors with a more long-term valued asset over the USD.

Stablecoins have more stability with a more stable asset backing them up, so exchanges and platforms are more readily accepting of listing them on their platforms. To users, digital gold currencies provide trading and investing mechanisms that are less volatile, cheaper, and quicker for making transactions.