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Gold-backed tokens can be considered as a perfect hedge as they are available for practically everybody, they cannot be seized or frozen by the authorities and can be transferred between wallets without restrictions. Find out more in the article.
In the last half a decade, concerns that the economy may be on the brink of another recession have become increasingly prevalent, as governments continue to slash interest rates, rescue failing corporations, and most recently – struggle to get a handle on the coronavirus pandemic.
At the same time, interest for safe hedges that maintain or improve in value, even during times of economic uncertainty has dramatically increased, as more and more people recognize the need to protect the value of their assets.
Gold has long been known as one of the strongest hedges, and the recent launch of gold-backed cryptocurrency tokens now makes the precious metal more accessible than ever before.
Fiat Currency Suffers from Inflation
One of the main reasons investors look to open a hedge position is to buffer against the negative effects of inflation.
Briefly, inflation is the term used to describe a general increase in the cost of goods and services in an economy over a fixed period of time. Because of inflation, the purchasing power of most fiat currencies goes down over time – which means each unit of currency can purchase fewer goods and services as time goes on.
According to MeasuringWorth, the purchasing power of the US dollar (USD) has decreased by almost 85% in the last 50 years. Likewise, the USD also lost almost a third of its purchasing power between 2000 and 2020. This means money simply held in non-interest yielding accounts or as cash over this period has technically lost value and as such, were a poor store of value.
It isn’t just the US dollar that has been heavily affected by inflation either. The British pound sterling (GBP), Euro (EUR), and Japanese yen (JPY) have also witnessed staggering declines in purchasing power, and the issue doesn’t appear likely to slow down any time soon.
Gold, on the other hand, has largely appreciated in value in recent years and decades, and recently reached its highest value ever – at over $2,000 an ounce. The precious metal has seen its value increase by 80% in the last five years, whereas the US dollar has lost almost 99% of its purchasing power against gold since records began in 1718.
Because of this, fiat currencies have proven to be one of the worst stores of value, while gold has only grown in popularity as a hedge against inflation.
Gold-backed Tokens are Highly Liquid
Although gold has long been known as an effective hedge against the decline of fiat currencies, up until recently, there were very few gold traders, due to the difficulties in liquidating physical gold bars and coins at a fair price quickly.
With the advent of gold certificates and later derivatives and CFDs, gold trading became more accessible and more popular among brokers and accredited investors, as well as retail investors in some regions.
However, since derivatives and CFDs are not backed by real gold, and trading them is a complicated endeavor, there was an unmet need for a simple to trade financial instrument that is backed by true gold. This is what gold-backed cryptocurrency tokens are designed to address.
Unlike gold derivatives and CFDs, gold-backed tokens like CACHE gold (CGT) are available for practically anybody to purchase and trade. Each token is backed by a fixed amount of physical gold – 1 gram of pure investment grade gold in the case of CACHE gold – which can be freely transferred between holders or traded on cryptocurrency exchange platforms like Bithumb Global.
Because gold-backed tokens can either be traded on cryptocurrency exchanges, redeemed for physical gold, or sold directly to a broker or merchant, they are an excellent way to benefit from the appreciation of gold and can even be traded for a profit – all without the costs of trading physical gold.
They Cannot Be Seized or Frozen
For most of us, the typical way to store fiat currency is in a bank account, rather than as physical cash money. This seems like the safest way to store it after all. However, due to a little known process known as a ‘bail-in’, this might not actually be the case.
A bail-in is a type of economic rescue policy that sees banks on the brink of collapse be forcibly rescued by its creditors by canceling any debts to unsecured creditors and seizing the funds of some or all deposit holders. This essentially means investors can lose their money, while account holders can lose their deposits.
One of the most recent bail-ins occurred in 2017 when the Spanish bank Banco Popular received several billion dollars worth of funding after a bail-in was authorized by the European Union Single Resolution Mechanism. The bank was purchased by Santander for a notional sum of 1 euro, while around 300,000 shareholders lost 100% of their investment.
On the other hand, gold-backed tokens cannot be seized or frozen by the authorities or used for any bail-in scheme to rescue a failing bank or corporation. They can be transferred between wallets without restrictions and for an extremely low fee, making it extremely easy for holders to manage their finances and conduct transactions.
This, combined with gold’s history of appreciating in value and the ease of which gold-backed tokens can be bought, traded, or sold, makes them the perfect hedge.