Expert Insight

Crypto or gold? Why not both?

Shaun Djie, Co-Founder of Digix, argues that gold-backed tokens bring the best of both worlds, allowing investors to enjoy low transaction fees of cryptocurrencies and the stability of gold

2018 was a rough year for the world of finance, as global equity markets recorded their poorest performance since 2008 and the onset of the financial crisis. As we enter 2019, the possibility of a protracted US-Sino trade war, recent US federal interest rate hikes, and the uncertainties of Brexit, mean that the global markets are far from predictable.

While 2017 and 2018 saw many institutional investors turn to digital assets as a way of diversifying product offerings and portfolios, the recent downturn in the cryptocurrency market has stoked fears that this new asset class offers little long-term protection or stability for investors, forcing many to look for an alternative.

Against a backdrop of uncertainty in the global financial markets, with banking giant JPMorgan Chase predicting a 60% and 80% chance of recession by 2020 and 2021, respectively, it is likely that 2019 will witness renewed investor interest in gold as a safe haven from fluctuating markets, as the price of this “recession-proof” asset trends consistently upward.

Gold has historically been viewed as a safe haven investment, with little correlation between its value and activity in wider financial markets. In times of economic downturn, gold has often increased in value as other assets, including fiat currencies, equities, and bonds, all witness price decline.

The use of gold as a store of value, particularly in times of economic and political instability, stretches back to ancient times, and continues today, where financial institutions and banks all over the world maintain much of their reserves in precious metals to ensure long-term retention of value and insulation from market fluctuations.

However, as investors are drawn to traditional safe havens, such as gold, there are many benefits offered by some digital assets which are desirable, including increased traceability, tradeability, and fungibility. This is where tokenized gold comes in, bringing the best of both cryptocurrencies and physical gold to financial markets.

“While still in its infancy, tokenized gold seems fit to make progress in 2019, bringing the benefits of a time-tested and reliable asset class to the 21st century digital economy, complete with the benefits which made cryptocurrencies a popular choice for institutional investors in 2017 and 2018”

Tokenized gold serves as a digital representation of real-world ownership, where digital tokens represent a given quantity of real-world precious metals. Tokenized assets can present investors with the peace of mind that their holdings are in tangible assets, with the added ease and accessibility of purchasing these assets online, anywhere in the world. A midpoint between cryptocurrencies and traditional gold, tokenized gold maintains the convenience of cryptocurrency while deriving value from an underlying real-world asset.

Beyond the overall accessibility granted by tokenized gold to investors, by purchasing tokens online, it is possible to buy gold at competitive prices while avoiding the unfavourable buy-sell spread that often comes with investing in physical gold. This flexibility allows retail investors with smaller capital to micro-invest in precious metals, opening up the market to many who were previously denied access.

Tokenized gold holders also avoid the onerous task of storage that comes with owning physical gold as token issuers take care of holding, storing, and transferring the physical asset. Furthermore, ownership of tokenized gold can be easily transferred to anyone around the world instantaneously. This provides token holders with easy access to liquidity while selling physical gold bullion can be limited by geographic location and availability of resellers or traders that charge a margin for their services.

While still in its infancy, tokenized gold seems fit to make progress in 2019, bringing the benefits of a time-tested and reliable asset class to the 21st century digital economy, complete with the benefits which made cryptocurrencies a popular choice for institutional investors in 2017 and 2018.

While the outlook for global financial markets remains unclear, and investor confidence in both fiat currencies and cryptocurrencies is shaken, it would appear that the market for gold and asset-backed digital assets has a bright future ahead.

By Shaun Djie, Co-Founder, Digix

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