In Part 1 of ‘From bartering to blockchain: evolution, tokenisation and the gold v Bitcoin debate’, we explored the history of money, highlighting the emergence of tokenised gold in which this cutting-edge concept combines gold's reliability together with the advantages of blockchain technology. This week, our attention turns to prominent tokenised gold issuers, analysing their operations and market impact; we also consider the ongoing discussion about the merits of gold versus Bitcoin as investment stores. Gaining insights into these trends can help investors make more strategic decisions in the digital asset space.
Key issuers of tokenised gold
Over the centuries, gold transitioned from being a primary form of currency to a reliable safe haven during economic crises, particularly evident in the 1970s. With double-digit inflation, gold's value skyrocketed from under $300 to nearly $2,600, marking a 700% increase and far exceeding inflation rates. However, when adjusted for inflation, gold's performance in the last decade has been underwhelming, offering only a 30% return. Meanwhile, with an inflation-adjusted return of over 3,700% and an annual return averaging 44%, Bitcoin contrasts sharply. Despite frequent critiques of its volatility, this aspect has lessened with maturation. This volatility has, despite sharp periodic declines, been instrumental in Bitcoin achieving its status as the top-performing asset. And, apart from its price performance, Bitcoin's superiority is evident in several areas. Its fixed supply of 21 million coins contrasts with gold, which can be influenced by mining and discoveries. Bitcoin's decentralised structure ensures security via a globally maintained blockchain network, making it resistant to government interference - unlike gold, which has historically been impacted by regulatory actions such as Executive Order 6102. JPMorgan reveals that Bitcoin now commands a larger volume-adjusted portfolio allocation than gold, reflecting changing investor preferences. With a market cap exceeding $1.3 trillion and trading volumes surpassing those of gold, Bitcoin's prominence in portfolios is growing rapidly. The launch of Bitcoin spot ETFs, which could hold as much as $62 billion, emphasises its growing mainstream acceptance. The ascent of Bitcoin poses a significant challenge to gold's traditional status as a store of value. And, with its digital attributes (scarcity, security and increasing adoption), Bitcoin is ideally suited for a digital age marked by currency devaluation fears. As investors increasingly opt for digital assets for wealth preservation and growth, Bitcoin's evolution suggests it may surpass gold as the ultimate store of value.
So, why tokenise gold? Tokenising gold offers numerous advantages, particularly for institutional investors. HSBC’s tokenised gold bars, for instance, create a digital twin of existing physical gold, traded on a digital platform. This allows for fractional trading, with tokens representing as little as 0.001 troy ounces, whereby enhancing liquidity and accessibility. Unlike gold ETFs, which involve buying shares in funds that own gold, tokenised gold provides direct ownership of physical gold stored in secure vaults, traded on blockchain platforms. However, tokenisation does come with trade-offs. The privacy of physical gold ownership is compromised when recorded and traded on a blockchain. Additionally, tokenised gold introduces counterparty risk, which is minimal in direct physical gold ownership. To mitigate these risks, investors might choose to keep their physical gold in secure locations or ensure it is allocated and segregated in trusted vaults. Tokenisation involves creating a digital representation of value for either digital or physical assets through digital tokens and these tokens are recorded on a digital ledger or blockchain, akin to how cryptocurrencies record transactions. HSBC’s new product digitises its loco London gold, stored in its London vaults. Each bar weighs 400 troy ounces (12.4 kg), valued at approximately £700,000 (November 2023). For institutional investors holding significant gold volumes, the digital tradability of tokenised gold offers a blend of traditional security and modern convenience. Currently, tokenised gold remains largely inaccessible to retail investors, but, as platforms evolve, this could change, making fractional gold ownership without the complexities of physical storage a reality for more investors.
Digital gold offers lower entry thresholds and transaction transparency, crucial for investors navigating inflation and market volatility. Tokenised gold’s seamless digital trading contrasts with physical gold’s storage costs and liquidity limitations making it an attractive diversification tool in investment portfolios. The process involves verifying and authenticating physical gold assets, selecting tokenisation platforms such as Polymath or Tokensoft, creating smart contracts for token issuance and ensuring regulatory compliance and asset security. Leading projects include Tether Gold (XAUT), PAX Gold (PAXG) and DigixGlobal (DGX), each backed by physical gold reserves stored in secure facilities. These projects enhance gold's accessibility and liquidity in digital markets. Investors should consider compliance risks amid evolving regulatory frameworks, the security of gold custody, crypto market volatility affecting token values, and potential risks of investing in unverified projects lacking physical gold reserves. Undeniably, tokenised gold represents a pivotal convergence of traditional wealth preservation with cutting-edge blockchain technology. As institutions such as HSBC embrace digital representations of physical assets, the landscape of gold ownership expands to include fractional trading and enhanced liquidity. Yet, challenges such as privacy compromises and heightened counterparty risks underscore the importance of balancing innovation with security. For investors, navigating these complexities requires careful consideration of regulatory frameworks, custody security and market dynamics. Looking forward, the evolution of tokenised gold promises broader accessibility and efficiency - reshaping investment strategies in a digital age where the melding of precious metals and blockchain innovations offers unprecedented opportunities. So, how will you embrace the future of digital gold?
This article first appeared in Digital Bytes (7th of August, 2024), a weekly newsletter by Jonny Fry of Team Blockchain.