Throughout history, gold has been seen as a safe haven asset that protects against inflation as well as political turmoil. Cryptocurrencies offer decentralization, security, and the ability to transport your assets anywhere in the world simply by remembering your seed phrase. Thus, gold-pegged cryptocurrencies are the absolutely best hedge against uncertainty…..or are they? In this post, I’ll explain what gold-backed stable coins are, what they do, and why.
How Good Is Gold??
On the surface, it seems like gold backed cryptos could be the ultimate hedge as they allow you to own gold with all of the benefits of cryptos, however, I feel that gold cryptos leave a lot to be desired for two separate reasons. For one, the underlying asset (gold) hasn’t performed up to expectations. Given that the basic S&P 500 index has drastically outperformed gold over the past few years, I feel that the purchasing power / inflation argument in favor of gold (and consequently gold backed cryptos) isn’t that strong.
In view of this, many will say that gold is a last ditch store of value for end of the world type situations when the stock market has crashed and the world looks like a scene out of Mad Max. For the sake of argument, let’s assume that gold does survive into this scenario and that people really are willing to give up some of their survival supplies in exchange for something shiny (unlikely, but let's go with it). Even if we grant that physical gold can be used in an apocalypse scenario, owning a gold backed crypto could be of little value in a world where there is no electricity or internet that would allow us to spend it. Even assuming we have the internet and power, a scenario that necessitates bartering gold would likely mean a complete breakdown in terms of international logistics which would make it extremely difficult to redeem your gold crypto for physical gold.
This post isn’t meant to trash gold as I do think it has a small place in a portfolio. However, my main point is that the normal, day to day investor could have realized substantially better returns (and thus better preservation of purchasing power) from investing in an index stock fund than investing in gold. For those who view gold as insurance against the end of the world, it seems evident to me that holding tangible, physical gold would be a better option. Of course, this is merely my opinion, and I always like hearing what others have to say, so feel free to leave it in the comments. As always, nothing is financial advice and thanks for reading. For more info on this topic, check out great video from Scott C Business.
References
https://www.longtermtrends.net/stocks-vs-gold-comparison/
https://www.youtube.com/watch?v=ZfD63Svv7ws
