Merging the digital and traditional financial worlds – challenges and solutions compared to traditional precious metals trading – discussion contribution by Dr. Peter Riedi, precious metals expert and economist.
Cryptocurrencies and in this context tokenization are getting more and more attention. The combination of intangible cryptocurrencies and very real precious metals such as gold creates a secure store of value. Depending on the investment strategy, precious metals are considered a sensible investment to increase value for individuals. For the certainty that the value investment will survive even during crises, newly developed methods are enriching the financial world.
Cryptonization of precious metals: The combination
With cryptocurrencies, such as the Bitcoin, it is criticized that this is only a virtual currency without any hedging back. It is merely created by supply and demand and has no other backing. In contrast, precious metals are tangible and demonstrably stable. The problem with these, however, is that they are more difficult to handle and it is not always easy to obtain value creation.
When cryptocurrencies and precious metals are combined, you get a crisis-proof product, which is in line with the trends of the future. In addition, both components have the advantage that they are not based on debt and there are no other promises of payment to third parties. Another important fact is that gold is naturally limited in its physical occurrence and the blockchain is mathematically limited.
How it works
Token creation requires the blockchain of the provider Ethereum (ETH) or another. Ethereum blockchain is an open source software database and in this database the respective precious metal is deposited. Certain shares of it are created, called tokens. Each token can be obtained if a person’s access rights allow it. For most gold tokens, this corresponds to one gram of gold.
Blockchain and tokenization technology can also be applied to precious metals. In March 2016, the company Digix Global took the principle of gold speculation and created digital gold with the peculiarity that the individual Digix Gold tokens are directly linked to real value – that is, gold. Caution is advised when choosing gold-backed cryptocurrencies through careful comparison and analysis because not all offerings have real-world coverage with real gold.
Do precious metals and tokens represent the trend of the future?
The question is, „Does tokenization of gold contribute a meaningful measure of value creation?“ Already today, some companies offer this service to financial investors. Here, it must be kept in mind that all providers are dependent on the central regulation of cryptocurrency and gold backing. A well-known example is the Digix Gold Token (DGX), which is backed by proven gold reserves on the financial market.
Whether to invest in gold tokens already depends on each type of investment. For risk-averse investors, security through standards and regulations are paramount; they should wait until there are comprehensible regulations and laws for tokenizing precious metals across the board.
Nevertheless, this combination of precious metal and cryptocurrency promises to be a good investment for the future with good appreciation. It is also believed that in the future, established institutions and exchanges will see the advantage of, for example, „gold tokens“ and offer them to risk-averse customers. For risk-affine investors, cryptocurrencies already offer potential to invest their money as an investment in these instruments. It should be borne in mind that these investors have to resort to online platforms, and the peculiarities of each portal should be taken into account here.
Dr. Peter Riedi
Economist & precious metals expert
EM Global Service AG
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Located in the heart of Europe, EM Global Service AG designs and manages commodity and precious metal concepts. The range of services of EM Global Service AG includes the acquisition, custody and security of physical precious metals for the owners, the buyers. The company with her team builds on economic stability and secure it with reliability and discretion in asset custody in the heart of Europe. For more information, visit www.em-global-serevice.li