Crypto industry courts gold bugs as bitcoin loses some luster
The cryptocurrency world is seeing a surge in the issuance of gold-backed tokens, with some of the digital-asset industry’s biggest and most controversial participants joining in on the fresh gold rush.
The throng behind the Tether stablecoin and the Bitfinex trading platform plan to issue Tether Gold before Christmas. The token will be backed 100% by bullion reserves, according to Paolo Ardoino, who serves as chief technology officer for Bitfinex and Tether.
“Current macro-finance uncertainty brings the need of traditional instruments to hedge risk of our customers, especially in the crypto-industry,” the London-based Ardoino said in an email. “Gold has been, historically, an important asset for risk contingency.”
While Bitcoin has been touted as “digital gold” pretty much since its 2009 debut, more crypto participants are now emphasizing the hedging possibilities of the actual precious metal. Paxos debuted Paxos Gold in September, and CoinShares Group launched a gold token in October, bringing the number of gold-related tokens to more than 20.
“Gold tokens are appealing due to a confluence of events: Weakening real interest rates and weakening national currencies combined with increasing regulatory clarity around non-security tokens and the natural appeal of gold to investors,” said Danny Masters, chairman of London-based CoinShares.
One of main selling points for the crop of new gold digital coins is ease of trading, compared with owning actual gold bars, which need to be stored or held by custodians. Crypto alternatives will still provide custody services, but with the flexibility that comes with the decentralized-ledger system known as blockchain.
Bitfinex is exploring new products as its trading volume slows, a trend seen across most crypto exchanges. Bitcoin, the industry bellwether, has traded in a fairly narrow range since June. Volume on some Bitfinex-listed coins has dropped as much as 10% since early summer, according to data researchers Coin Metrics and Bitcoinity.
“This could be a function of Binance’s launch of futures, the rise of newer exchanges like FTX and Deribit, or just wariness of regulators and their ongoing back and forth with the exchange,” said Nic Carter, co-founder of Coin Metrics.
In April, New York’s attorney general accused the private Hong Kong-based company behind Bitfinex and Tether of a coverup after losing about $850 million of client and corporate funds. The companies later said that Tether -- used widely by traders as a conduit for trading other coins -- is only 74% backed by cash and short-term securities, while they previously implied it was 100% backed by dollars. Tether reserves are not independently audited.
Ardoino said British Virgin Islands-based Bitfinex’s volume declined, in part, because the exchange doesn’t have an internal market-making desk that trades against its own customers or generates fake orders as some rivals in the industry have been accused of doing. It also doesn’t offer special near-zero fees to select traders as many exchanges do, he said.
“Volume is a metric that can be subject to manipulation, so it is much more important to look at liquidity as the key metric that makes sense and that can’t be easily inflated,” Ardoino said.
Despite its legal controversies, Tether is still the most used stablecoin, with a $4.1 billion market capitalization that has continued to grow.
“It’s clear the market trusts Tether to offer USD-backed tokens, so it makes sense that Tether wants to offer gold-backed tokens,” said Tushar Jain, managing partner at crypto hedge fund Multicoin Capital in Austin, Texas.
Efforts to digitize gold have a long history. At one point millions of people bought an online currency known as e-gold, before it was suspended about a decade ago due to legal issues.
“No one has had much success with non-USD stablecoins, or gold-backed crypto, so I don’t anticipate anything major happening here,” said Aaron Brown, an investor and a writer for Bloomberg Opinion.
The exact logistics of how Tether Gold will work are still unknown. Paxos, for instance, stores all its gold in Brink’s vaults, and everyone who owns its tokens owns the underlying physical gold, held in custody by Paxos Trust Company -- so it can be redeemed for actual gold bars.
Whatever it is, traders are already getting ready for it.
“I wouldn’t be surprised if there was significant customer interest,” said Sam Bankman-Fried, the Hong Kong-based chief executive officer of crypto trading firm Alameda Research. “A lot of crypto traders also have opinions on gold.”