Pax Gold: a Gold-Backed Cryptocurrency
September 1, 2021
Pax Gold is the most important gold-pegged stablecoin on the market. To understand the advantages of such a currency, let’s first see how traditional gold investing works.
Gold as an investment
There are several ways to invest in gold in the traditional market.
Each involves a different financial instrument. Find out more about financial instruments in our article.
Physical gold (bars and coins)
It is possible to buy bars or coins either online or in physical shops. However, this involves several risks and complications:
- It must be stored safely, as it is more exposed to theft.
- It is difficult to transport.
- It is difficult to resell quickly for a profit (not very liquid).
- If it is coins, it may be valued by buyers for its collectable value rather than its actual gold content.
- You should actively seek out quality gold to make a good investment and make sure it is good.
Futures are contracts that produce a profit based on the outcome of the price. They are financial products suitable for experienced traders. Futures, which allow you to trade on the price of gold, are practical because they allow you to own a quantity of money in gold, without having to own physical gold.
ETF that hold gold
ETFs are known to be an accessible and manageable asset class even for non-experts, but they must be understood anyway.
This kind of ETF holds a certain number of gold bars for each ETF unit issued. Buying an ETF unit, therefore, means owning part of the gold held by the fund.
Since these ETFs hold physical gold, their prices move in step with the price of gold in the short and long term.
Stocks work differently from gold price-tracking instruments, as their performance depends on the performance of the company as well as the demand for gold.
In this case, you need to pay attention to how well-established and reliable the company you are buying shares in is, and to its growth and production potential. Find out more about shares as a financial instrument in this article!
ETFs that own mining stocks
It is also possible to combine the characteristics of the last two financial instruments. There are also ETFs that hold shares in gold-producing companies. They usually collect shares of companies that are either high performers or long-established in the market, but it is worth doing your own research.
This type of ETF is diversified and protects against the failure of a single company, but you remain vulnerable to crises that affect the entire industry.
Why do people invest in gold?
Gold has always been considered a safe-haven asset. This means that it is an asset that people turn to in times of economic crisis. While stocks and bonds take the brunt of a market downturn, gold often manages to stay afloat, if not perform positively.
This is because its value is not correlated with the performance of the rest of the market.
The main factor contributing to keeping its price positive is scarcity: for an asset to be of value, it is essential that it is not too widespread or easily available. Gold meets this criterion perfectly, as its supply is notoriously limited.
Is it possible to obtain gold in the form of cryptocurrency?
Yes, Pax Gold is currently the most successful attempt to combine the advantages of gold with those of a blockchain-based currency.
A cryptocurrency that replicates the price of gold and is pegged to a gold reserve is a type of stablecoin.
Its value is therefore not as volatile as that of other cryptocurrencies, but is identical to the price of gold futures.
Being issued by a company and anchored to reserves held by financial institutions or banks, a stablecoin is not fully decentralised, but is based on blockchains that are usually decentralised.
Pax Gold, for example, is an ERC20 circulating on the Ethereum blockchain, but can also be supported by other blockchains.
The advantage of a gold-backed stablecoin over traditional forms of gold is especially obvious to those who already own other cryptocurrencies:
- Stablecoins are easy to trade and use on exchanges. You can buy as much as 20€ of ‘gold’.
- This form of gold is divisible even in small amounts, unlike financial instruments and bars.
- They can be stored and transferred on blockchain-based wallets.
What you should pay attention to before buying this type of stablecoin is:
- Liquidity, i.e. trading volumes on the various exchanges, and whether they support them
- That they have documented and transparent reserves
Pax Gold’s Features
Pax Gold was created by the Paxos Trust Company, which also issued the dollar-pegged stablecoin Pax Standard (PAX), renamed in 2021 to Pax Dollar (USDP).
Paxos is a trust and custodian company, regulated by the New York State Department of Financial Services. PAXG is also approved and regulated by the DFS. A nationally renowned auditor certifies each month that the PAXG token supply matches the underlying gold.
Each PAXG token is guaranteed by a 400oz fine troy ounce (t oz) from London Good Delivery, stored in the vaults of Brink’s, which is the London Bullion Market Association’s approved storage company.
If you own PAXG, you own the underlying physical gold, held in custody by the Paxos Trust Company.
In fact, PAX Gold is the only gold token you can redeem for LBMA-accredited Good Delivery gold bars. Smaller amounts can be redeemed through a network of physical gold dealers.
Pax Gold is therefore a great way to buy gold safely and securely, thanks to both its full regulation and blockchain technology.
On top of that, in comparison to other gold-backed cryptocurrencies, it is in a much higher position in the market, namely among the top 200.
Diving Deeper: Allocated vs Unallocated Gold
It is important to know this difference especially when you intend to buy physical gold. It’s all about ownership.
Allocated physical gold gives you full ownership of the gold underlying the investment: you do not become a creditor of a company or a bank, you are in effect the legal owner of a quantity of gold.
Most providers of physical gold investments actually deal in unallocated gold.
Unallocated gold is obtained in the form of an account comparable to a bank account: you become a creditor (not an owner) of an asset, and the institution that issued the credit is entitled to use the asset for its own benefit.
An investment in unallocated physical gold leaves you exposed to the risk of insolvency of the issuing institution, whereas usually in gold you seek the safety of a safe haven asset.
Moreover, the gold offered exists only in part, and if hypothetically all customers wanted to redeem the physical gold, the reserves would not be sufficient to satisfy all creditors.