When Bitcoin’s price hit gold parity (by the ounce) in 2017, cryptocurrencies first attracted the attention of gold investors across the world. However, the parity was short-lived, as Bitcoin has drastically dropped in value since. So far, in 2018, Bitcoin has at times shed its price by more than 50% of its year-end price of $13K in 2017, while the age-old durability of gold has defied the tests of time and continuously given real value to all investments.
The concept of a digital gold currency has always appealed to those searching for an alternative payment mechanism—even before the Bitcoin and Blockchain technology era. Not long after the internet went mainstream, E-Gold emerged as the first digital currency backed entirely by gold in 1995. At its height, this service was used by millions of people in hundreds of countries across the world.
However, like other, similar platforms that cropped up during the period, the downfall of E-Gold was inevitable. As the number of users increased, the servers buckled, thereby hanging transactions and frustrating users under the increasing traffic surge. Cyber-scammers joined the scene, launching a phishing offensive at customers and tricking thousands of them into revealing their E-Gold passwords until their accounts were drained. The final nail in the coffin was the program used for illegal activities, such as money laundering, as users could secretly open accounts and move funds anywhere in the world without a trace.
While the idea behind digitizing gold for transactions may not be new, technological advancements have allowed this idea to be realized better than ever before. For example, blockchain technology enables fast, secure, and transparent peer-to-peer transactions that are visible on distributed ledgers worldwide. All transactions are logged and put in a public ledger, which helps check authenticity and deter fraud. Blockchain is the underlying infrastructure that allows such transactions and removes the need for an intermediary. The power that blockchain technology holds is infinite, as it is stored on thousands of servers worldwide, thereby allowing millions of transactions to take place in seconds around the world.
This provides an unprecedented opportunity to merge gold’s age-old durability as a store of value with blockchain’s flexibility as a medium for transactions. There are now more than 1,500 cryptocurrencies traded around the world on 190 exchanges. Many of these are funded by a wide variety of resources, like fiat currency, energy, copyrights, and even memes. Needless to say, in the quest for a stable commodity, gold emerges as a pioneer to shape the foundation for cryptocurrencies.
What Other Factors Will Ensure Success?
For a gold-based cryptocurrency to be widely accepted, the liquidity that it promises to achieve must be secured. This can only be achieved by an allocation of 1:1, with each coin being an actual quantity of gold that is held in protected vaults around the world. This allocation allows investors to choose whether to exit the system - redeeming their stablecoins against fiat currency - or continue to participate in it.
This is also important to ensure consumers have the opportunity to spend this digitized gold as a fiat currency via a debit card that is accepted as commonly as Visa/Mastercard, which will push this currency away from being simply a commodity and towards becoming a functional medium of exchange. To defy Gresham’s law and overcome the failures of other asset-backed currencies, incentivizing transactions and ensuring constant movement within the system is also essential. This can be achieved by adding a specific, multifaceted yield system that promotes trade and fairly shares the fee pool that is produced within this monetary system.
When putting together these variables, the potential of a cryptocurrency based on gold is immense. This would not only resolve the increasing uncertainty of the cryptocurrency market but also allow gold to make its way into a globally accessible monetary system, thereby bringing cryptocurrencies up to the usage level where they need to be.