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Gold is one of the most popular investment assets and is traditionally considered to be an excellent store of value. In fact, the US Dollar was backed by the gold standard up until 1971. It is a great hedge against inflation, and it's a good idea to diversify your portfolio by investing 10%-15% of your net worth in gold.
Gold-backed Token
Although gold has numerous benefits as a financial asset, it's not easy to move or store, and it's difficult to divide into smaller units to be traded. So, having a Gold-backed Crypto Token is an ingenious idea. You could store it like any other Crypto asset, safely in a hardware wallet or MetaMask, have exposure to the gold market and be able to redeem your crypto for actual gold any time-all while not having to worry about its safety or storage.
In this article, we will mainly be focusing on PAXOS-Gold, although the characteristics & advantages are similar across almost all tokenized gold crypto. PAXG was created as an ERC-20 token on the Ethereum blockchain in 2019. Each PAXG token is redeemable for 1 troy fine ounce of gold, held in custody by Paxos. Let's compare it with other gold-backed assets available to retail investors, viz., Gold ETFs, Sovereign Gold Bonds (SGBs), and physical gold. Note that SGBs are only relevant to Indian investors.
Investment Minimums
For PAXG, the minimum purchase amount is just $20, for most Gold ETFs it’s around $200 while for SGBs it’s equal to 1gm worth of gold, i.e., Rs 4800 or $65. So tokenized gold is a clear winner here, making it highly accessible to any retail investor.
Expenses and Fees
Let us compare PAXG’s on-chain transaction & token creation/destruction fees (0.02%) to the expense ratio of reputed Gold ETFs in India and in the USA.
As we can see, Gold ETFs have significantly higher expenses involved than PAXG. Additionally, for an ETF, the expense ratio is charged annually while for tokenized gold the 0.02% fee is only charged during a transaction, and there are zero fees for HODLing it.
That being said, when you transact PAXG, you need to pay Gas fees in ETH, but again that’s very low in percentage terms if you are investing substantial funds. For small funds, one can just keep them in the exchange, in which case there’s no gas fee involved. With extremely low on-chain transaction fees and zero storage fees, tokenized gold-PAXG is effectively the most affordable way to invest in gold on the planet.
Also, we have not considered gold futures or CFDs in this article, because they are just derivatives based on price speculation, and do not involve the backing of physical gold at all.
Regulations
The ETFs are regulated by SEC and other equivalent central agencies, while PAXG is regulated by NYDFS. Similarly, SGBs are govt securities issued by Reserved Bank of India (RBI), making them highly secure investments. All of these assets are highly regulated and secure in this regard.
Ownership & Settlements
The ownership records for all Gold-ETFs are tracked & managed by a central agency, for instance, NSDL/CDSL in India, and DTCC in the USA. While on the other hand, PAXG is tracked & owned in a decentralized manner, by leveraging the Ethereum blockchain for transferring & creating/destructing tokens. This makes it highly secure, robust, and extremely fast. The settlement period for PAXG token is near-instant while for ETFs & SGBs it’s 2 business days.
Discussion & Conclusion
All the factors discussed above, like very low costs, fractional ownership, no territorial barriers combined with lightning-fast settlements times, makes PAXG an excellent financial asset with easy accessibility and high liquidity. Although we have only seen & compared the specifics of PAXG in this article, most of the benefits are by and large the same across other tokenized gold assets like DigixGlobal, OneGram, PerthMint, etc.
While it's certain that none of these assets are going to provide 100x returns like your hot-new ICO token, but gold will provide much-needed stability to your crypto portfolio, with stable consistent returns and a solid hedge against inflation. Also, note that it's possible to safely lend your PAXG tokens to crypto lending platforms like Celsius and BlockFi, and earn around 6-7% annual interest.
We are certainly in an early phase of blockchain adoption, and so far its application seems extremely promising. In the coming years, we can expect tokenization of more & more commodities and assets like land, stocks, ETFs, and precious metals-the future seems hopeful for crypto and decentralized finance.
