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Demand for gold-backed stablecoins rises as geopolitical tensions accelerate

Amid high inflation and ongoing geopolitical tensions, gold-backed stablecoins have gained traction, outpacing the overall growth of the crypto market.

Gold prices have gained 4.67% since the start of February, hitting a multi-month high.  And thus accelerating the trade volume of gold-backed stablecoins, which are digital tokens backed by physical gold.

The trade volume of gold-backed stablecoins. Source: Kaiko.com

According to a report by Kaiko, the two largest gold-backed stablecoins by trade volume are Tether Gold (XAUT), with a market cap of $200 million, and PAX Gold (PAXG), with a market cap of $420 million. Fascinatingly, PAX Gold volumes have practically doubled since September and Tether Gold volumes have seen a subtle burst in trading.  

Gold as certainty in uncertain times 

Overall, USD-pegged stablecoins remain dominant with regard to market cap and trade volume, with gold-backed stablecoins offered on only a small number of exchanges. Nevertheless, this unique investment product seems more familiar to traditional investors. As a result, many perceive gold in conventional financial markets as a barrier to inflation and a safe haven in geopolitical tension. 

“Many investors are looking to get involved with the volatile crypto asset class, and gold-backed tokens provide some protection against volatility,” said Edward Moya, senior market analyst at the foreign-exchange brokerage Oanda, adding, “Gold-backed tokens could continue to see massive appeal as gold’s outlook for the year improves.”

Since the gold tokens are tied to the price of the precious metal, the rising market capitalization merely represents an increase in the number of tokens outstanding: 

“What you are talking about is that there is issuance of gold-backed tokens,” said Mati Greenspan, CEO at Quantum Economics and former eToro senior analyst. “If they want to issue them, they issue them.” He added: “For investors, there’s little profit for gold-backed tokens as the price does not change much,” Greenspan said.

While commodity-backed tokens have seen a surge, still the market value of the gold tokens – now around $800 million combined – pales in comparison with Bitcoin’s $833 billion. 

In addition, in recent years,  price movement on gold has been feeble compared with many cryptocurrencies, whose prices have bulged by many multiples.

   

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