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Gold Tokenization: Benefits and Investment Opportunities

27 May 2024 updated
11 min

Table of content

Gold has been regarded as a safe investor haven since times immemorial. This precious metal was highly valued even in ancient times, symbolizing wealth and status. However, physical gold investments have been heavily limited in most countries throughout the 19th and 20th centuries, restricting retail investors’ access to bullion gold, using gold proxies like ETFs only. 

Digital gold has emerged to solve these problems. Tokenization of gold is one of the recent blockchain use cases quickly gaining popularity among crypto enthusiasts, investors, and businesses. The present-day market cap of tokenized gold has already reached 1.17 billion, which is a firm upward trend reflecting the rising prices of physical gold. 

Thus, as the global geopolitical situation gets worse and investor trust in long-standing assets like the USD shrinks, large-scale funds and retail investors return to gold as a safe haven. But is investing in a gold-backed cryptocurrency as safe as physical gold? What are the benefits of tokenized gold, and what risks are involved? Here is an in-depth introduction to blockchain technology in gold

Tokenized Gold Assets: How Do They Work?

Let’s first take a closer look at how investment works in the physical vs. tokenized gold markets. Direct investment in physical gold has been banned for a long time, and investors could only use secondary instruments, like stocks of gold-mining companies or gold ETFs, to gain a fair share of the rising gold prices. 

Yet, these gold investment strategies come with nuances and limitations. First, by buying the shares of gold-mining businesses, investors may take advantage of the gold price only indirectly and sustain the risks of the company’s location, quality of leadership, operational challenges, etc. The company’s business may fail even in the background of a steadily rising gold price, which is an unnecessary risk for a cautious investor. 

Investment in ETFs is a safer option in terms of pure gold investment. Yet, ETFs are not stocks, bonds, or other securities that you may hold in your bank account and exchange for physical gold. Like any other ETFs, gold-backed ones are only derivatives of the stock exchange instrument that an owner doesn’t actually own. That’s why such investments are also a risky strategy with limited investor control. 

When it comes to investment in tokenized gold, things are much more transparent and simpler for investors here. The scheme works as follows: 

  • The project acquires a certain amount of physical gold and stores it securely in its deposits. 
  • The company issues tokenized gold coins, the cumulative number and value of which equal the amount of gold in its vaults.  
  • The coins get into circulation and are used by traders, project users, buyers, and sellers. Their price is stably pegged to the price of gold, and in some cases, the coins may be exchanged for the respective amount of physical gold at any moment the owner claims such a possibility. 

This way, you may perceive digital gold as gold ownership tokens – securities that verify your right to a specific amount of physical gold. 

The same system works with tokenized gold ETFs – they are typically compiled of a group of gold-backed coins and help you invest in the whole niche instead of one or two issuers. This way, you distribute risks and can receive a more even ROI from the cumulative dynamics of gold prices. 

how digital gold works

Challenges of Physical Gold Ownership and Investment 

Today, people can buy physical gold in a bank or a specialized firm. Yet, despite its indisputable stability and reliability in the long run, such a method of gold investment blocks investors’ money in gold bullion for years to come. In other words, your money invested in gold loses its operational efficiency, and you can’t apply these funds elsewhere. 

It is also hard to use bullion gold as loan collateral, and selling physical gold is not as quick and easy as you may expect. You will need to find an interested party to purchase your bullion gold at a favorable price since banks usually acquire gold from retail sellers at a heavy discount from the net gold price. 

Besides, there is always a problem of fungibility. For instance, you have a 5-ounce gold bar but want to sell only 1 ounce. Cutting the bullion into pieces may be problematic and expensive; it may also cause some waste of this precious metal. Secure gold transactions are also a problem, especially if you’re a buyer; there is always a risk of purchasing a gold bar with impurities or a fake. 

Finally, the costs of gold storage may outweigh the benefit you receive from its mounting price; since these assets are very expensive, you won’t just keep them in a box at home. You will need a safe bank deposit box, which costs money.  

The Role of Blockchain in Gold Investment 

All of the risks and challenges with digital gold security, liquidity, and fungibility have given rise and popularity to the tokenized gold market. Digital gold is equivalent to physical gold stored in a safe location by the coin’s issuer, which frees you from the need to take care of the gold storage solutions.

At the same time, every coin you own comes with the ownership right for physical gold, giving you direct ownership rights, unlike those of gold ETF investments. These are the reasons why tokenization of precious metals has become so popular in the crypto space. 

Benefits and Investment Opportunities of Gold Tokenization 

Investment in digital gold and the wider gold trading benefits of gold-backed coins are serious reasons to take these assets seriously. By investing in digital gold, you receive the following unique benefits: 

  • Lower entry threshold. You can own a small fractional share of a gold token, which is much smaller than the smallest gold bar. This feature makes it possible to start your gold investments from as little as $10. 
  • Transactional transparency. The main feature of blockchain is a public ledger that makes all transactions traceable and open for all users. This is why fraud and manipulation are largely impossible on the blockchain. 
  • Liquidity and operational efficiency of digital gold. Unlike with physical gold, you can buy and sell your coins very quickly. Thus, it is easy to conduct frequent transactions with gold to take advantage of slight price changes, which is generally impossible with bullion gold. 

All in all, gold investments open many exciting opportunities for you. First, you can address inflation by investing in this conservative instrument with fewer risks and limitations. Second, you can take advantage of the rising gold prices similar to traditional gold investments. Third, getting some digital gold to your portfolio is always a great diversification measure that can protect your assets from rapid price turns in the crypto market.  

digital gold benefits

Gold Tokenization Process

So, how is gold tokenized in technical terms? Here is an algorithm that most projects apply: 

  • Asset verification and authentication. You need to prove you have the amount of physical gold that you’re planning to turn into tokens. 
  • Selection of the tokenization platform. You choose the platform on which your tokens will be minted (e.g., Polymath, Meld Gold, Tokensoft, and the like). 
  • Creation of smart contracts. As all crypto operates using smart contract technology, you should also create a smart contract that will peg a certain amount of gold to your token and include the digital seal of ownership into it. 
  • Token issuance. That’s the exact stage of your tokens’ minting based on the logic you’ve incorporated into your smart contracts. 
  • Custody of physical gold. Once the tokens get into circulation and are acquired by users, 
  • Tokenization. Your physical gold gets pegged to your issued tokens. 
  • Liquidity and trading. You issue the tokens into circulation and ensure that there is no price slippage for users who want to buy or sell them. 
  • Regulatory compliance. Gold-backed coins need to comply with general regulations on digital assets in terms of issuance, circulation, custody, and exchange for physical gold. 
  • Security and auditing. You should provide timely updates and reports on the secure storage of physical gold backing your assets. 

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Tokenized Gold Projects’ Examples 

What are the best-known projects in the gold token market? Here are several notable players standing at the grassroots of blockchain asset management for gold. 

  • Tether Gold (XAUT). A world-known issuer of the USD analogue in the crypto space, Tether has recently launched a gold-backed coin, XAUT. The whole amount of gold supported by these tokens is stored in a secure Swiss vault, and 1 XAUT equals one troy ounce of gold you may claim at any moment. 
  • PAX Gold (PAXG). This token represents the gold reserves of Paxos Trust Company, which keeps its gold in Brink’s vaults and also equates 1 PAXG to one troy ounce of gold. 
  • DigixGlobal (DGX). Digix is a crypto project aimed to democratize gold ownership and give anyone access to digitized gold. It has launched DGX, with each token backed by the company’s proprietary Proof of Provenance protocol. One DGX equals one gram of gold. 

There are dozens of other gold-backed token projects online, with the trading volume of digital gold exceeding 23 million per 24 hours. The top three names in terms of trading volume on Coingecko are PAX Gold, Tether Gold, and Kinesis Gold. 

Risks Involved in the Tokenization of Gold 

Along with so many tokenized asset benefits, you should take into account the common risks this sphere may come with. The most notable threats are: 

  • Compliance risks. Since the crypto market is only evolving today, with ambiguous or absent regulations to govern it, crypto projects often get into non-compliance traps and are fined by regulatory authorities. 
  • Gold custody. There are always security risks associated with physical gold storage, as your tokens entitle you to the ownership of a certain amount of gold the project stores somewhere without your direct control. 
  • Crypto market’s volatility. Though gold-backed coins are pegged to the price of gold, they are still susceptible to volatile fluctuations typical for the crypto industry. 
  • Project’s reputation. Investors should always factor in the risk of running into a crypto scam, which may have no physical gold reserves and only steal money from unsuspecting investors. 

Ready to Build a Gold Tokenization Platform? 

If the gold tokenization benefits we’ve discussed above appeal to you, welcome to 4IRE – your dedicated and experienced asset tokenization partner. We can create a digital gold project for you to tap into the fast-growing gold tokenization niche, either as a provider of gold-backed cryptocurrency or as an exchange platform for gold assets. 

Our business analysts also provide competent blockchain consulting services to help you find the proper technology and feature mix for entering this industry without friction or regulatory issues. We make gold investment and all forms of tokenization work easy and risk-free for clients in all specializations and jurisdictions. Welcome to 4IRE to supercharge your crypto project, take advantage of gold investment trends, and reach new heights of security, reliability, and trust in the dynamically developing blockchain universe.  

FAQ

Is there a digital coin backed by gold? 

Yes, there are many cryptocurrencies currently circulating in the blockchain universe that are backed by physical gold and pegged to their price. Some notable examples of gold-backed coins are PAXG – the cryptocurrency of PAX; XAUT – the gold-backed coin of Tether; and KAU – the gold-backed crypto asset of Kinesis Gold. Many others exist in the market and are used within specific crypto projects or are in open circulation.

What are the benefits of gold tokenization? 

Gold, like other tokenized commodities, receives additional liquidity and operational liquidity compared to its conventional, physical state. It becomes much easier to buy, sell, and trade gold in much smaller fractional shares than bullion gold allows. Besides, digital gold can be used for staking and earn you a fair interest rate instead of being stored in a deposit box.

Can I redeem my gold tokens for physical gold? 

Yes, the majority of projects offering gold-backed coins claim to have the bullion gold reserve corresponding to the number of coins in circulation. Due to such an arrangement, all people considering digital gold investment have the right to exchange their coins for physical gold at any moment they need to.

How can I invest in gold tokens? 

Gold tokenization has made it very easy and intuitive to invest in gold via a variety of available gold-backed coins circulating the crypto market. You can buy varied gold-backed cryptocurrencies for fiat money or crypto assets (USDT, BTC, etc.) and store those coins on your account or cold wallet for as long as you want. Exchanging them back for crypto or fiat money or for a specific amount of gold is also very easy and can be done within minutes on crypto exchanges that support that currency’s circulation or gold trading platforms.

Is gold tokenization the same as owning physical gold? 

Generally, these two concepts may be considered equal because the project can’t produce tokenized gold and offer it to clients if it doesn’t possess that gold reserve in the form of physical bullion gold. The system should work this way, at least in theory. That’s why only projects that prove the ownership of equivalent physical gold enjoy investor trust.

Are there any risks associated with gold tokenization?

The popularity of holding gold in the form of digital assets is quickly growing due to the comparative benefits of this form of yellow metal. Yet, you should keep in mind that gold-backed cryptocurrencies, like any other tokenized assets, come with unique risks associated with the crypto market. These are the custody-related risks (the risks you run by holding gold coins on a crypto wallet), redemption limitations (the availability of withdrawal or physical gold exchange options), and regulatory risks (the project’s non-compliance with regulations on digital assets).

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