Can gold-backed cryptocurrencies give you better returns than gold?

Gold-backed cryptocurrencies are gaining traction as an innovative solution to the unpredictability of traditional cryptocurrencies like Bitcoin. Unlike Bitcoin, which is often referred to as "digital gold," gold-backed crypto ties its value directly to physical gold, offering more stability in a volatile market.

“Digital coins backed by gold provide extra stability compared to other cryptocurrencies, which often lack intrinsic value,” said Brian Deshell, a UAE-based cryptocurrency analyst. “The price of these cryptocurrencies will not drop below the value of the gold backing them, ensuring greater price predictability. This stability makes them a type of ‘stablecoin.’”

Stablecoins are cryptocurrencies pegged to other asset classes, such as fiat currencies or commodities like gold. They’re designed to maintain a steady value, reducing the dramatic price swings seen in traditional crypto assets.

Gold-backed cryptocurrencies address a major issue of digital assets: volatility. “The unpredictability of cryptocurrencies makes them unsuitable for everyday use,” Deshell explained. “In contrast, gold offers steady value, making gold-backed crypto appealing to cautious investors.”

This isn’t a new concept. Gold-backed currencies existed as early as 1861 to stabilize economies. However, they disappeared when hoarding disrupted the system.

The success of gold-backed cryptocurrencies is closely tied to gold prices. In early 2022, gold reached near-record levels of over $2,000 per ounce before falling by 20% later in the year. Meanwhile, Bitcoin prices fluctuated far more drastically, at times halving in value within weeks.

“Gold’s relative stability makes it a safer bet for investors compared to Bitcoin,” noted Zubair Shakeel, a UAE-based investment manager. “The higher gold prices climb, the more stable and attractive gold-backed crypto becomes as an asset.”

Gold-backed cryptocurrencies offer benefits such as reduced volatility and ease of digital trading. However, they are not without risks. “Unlike physical gold, digital assets are prone to cybersecurity threats and fraudulent platforms,” cautioned Deshell.

Moreover, gold-backed crypto tokens are pegged to the price of gold, meaning their value could drop if gold prices crash—though such instances are rare. Shakeel emphasized the importance of diversifying investments, noting that gold-backed cryptocurrencies should complement other assets rather than dominate a portfolio.

Gold-backed cryptocurrencies combine the stability of gold with the flexibility of digital assets. They serve as a hedge against the volatility of traditional cryptocurrencies and allow investors to leverage the stable gold market without physical ownership.

“As global markets face continued uncertainty, the demand for gold-backed crypto is likely to rise,” Shakeel added. “These stablecoins offer a unique opportunity to make informed decisions using real-time gold market data.”

However, investors should remain cautious, balancing the advantages of gold-backed cryptocurrencies with potential cybersecurity risks and market trends.