What Are Commodity-Backed Cryptocurrencies?

Commodity-backed cryptocurrencies are digital currencies that are backed by a specific commodity, like gold or oil, which serves as a guarantee of its value. This is in contrast to traditional cryptocurrencies, for example Bitcoin, which are not backed by any physical asset or government entity. Instead, the value of these currencies is determined by supply and demand in the market.

Proponents of commodity-backed cryptos posit several advantages, such as being more stable and less volatile. Because the value of these currencies is tied to the value of a specific commodity, they are less subject to wild and sudden price fluctuations than traditional cryptos, which can experience rapid price swings based on market sentiment and other factors.

Another possible advantage of commodity-backed cryptocurrencies is that they may be more secure than traditional cryptocurrencies, and therefore attract greater investment. Because they are backed by a physical asset, investors can be more confident that their investments are protected.

Potential Drawbacks of Commodity-Backed Cryptocurrencies

It is worth noting that while commodity-backed cryptos offer several advantages over traditional coins, they are not without risk. These digital currencies would still be subject to the same risks as the commodity they are backed by. For example, if a commodity-backed cryptocurrency is tied to the price of oil, and the price of oil suddenly drops, the value of the currency may also decrease.

Another potential drawback of commodity-backed cryptocurrencies is that they may be more difficult to trade than traditional cryptocurrencies. Because these currencies are tied to a specific commodity, they may not be as widely accepted or traded as traditional cryptocurrencies.

There is also a risk that commodity-backed cryptocurrencies could be subject to fraud or other forms of financial misconduct. Because these currencies are relatively new and untested, there is a risk that some issuers may engage in fraudulent activity or misrepresent the value of their currencies.

Do Commodity-Backed Cryptocurrencies Already Exist?

There are already several commodity-backed cryptocurrencies in existence. Here are a few of the notable ones:

• Tether Gold (XAUT) — Tether Gold is a cryptocurrency backed by physical gold. Each XAUT token is backed by one troy ounce of gold held in a Swiss vault. This provides investors with a convenient way to invest in gold without actually owning physical gold.

• DigixDAO (DGD) — DigixDAO is a cryptocurrency backed by physical gold. Each DGD token is backed by one gram of gold. The gold is held in a vault in Singapore, and investors can redeem their DGD tokens for physical gold.

• Petro (PTR) — Petro is a cryptocurrency backed by oil. The Venezuelan government launched Petro in 2018 as a way to bypass US sanctions. Each Petro token is supposed to be backed by a barrel of oil, but there have been doubts about the authenticity of the backing.

• Diamond Standard (DPT) — Diamond Standard is a cryptocurrency backed by diamonds. Each DPT token is backed by a physical diamond that is certified by the Gemological Institute of America (GIA). Investors can buy and sell DPT tokens on cryptocurrency exchanges.

• Paxos Gold (PAXG) — is a cryptocurrency that is backed by physical gold. Each PAXG token is backed by one troy ounce (31.1035 grams) of a 400-ounce London Good Delivery gold bar that is stored in professional vault facilities in London. The gold is audited regularly, and the token can be redeemed for physical gold if desired.

As of March 15th, 2023, the market capitalizations of three of the above-mentioned commodity-backed cryptocurrencies are as follows:

• Tether Gold (XAUT): Approximately $10.3 billion USD
• Paxos Gold (PAXG): Approximately $1.3 billion USD
• DigixDAO (DGD): Approximately $85.5 million USD

Potential Use Cases:

This innovative type of digital currency has a wide range of potential use cases that can significantly impact the global financial system. Here are just a few possible use cases.

• Global Remittance: Digital currencies backed by commodities can be used as a store of value for remittance purposes. Workers who send money back home to their families could use these cryptocurrencies to avoid the fees and delays associated with traditional money transfers

• Investment: Investors can use commodity-backed cryptocurrencies to diversify their portfolio and hedge against inflation. While many cryptocurrencies are inherently anti-inflationary, like bitcoin, investing in a commodity-backed crypto can be another way to possibly mitigate potential inflation.

• Trading: Traders can use commodity-backed cryptocurrencies to speculate on the price movements of various commodities without actually owning them. This is especially useful for traders who are not interested in taking physical possession of the underlying assets.

• International Trade: Like traditional cryptocurrencies, digital currencies that are backed by commodities can potentially be used to facilitate cross-border trade. Buyers and sellers can use these cryptocurrencies to settle transactions, avoiding the need for banks and other intermediaries.

Future Developments:

The future of commodity backed cryptocurrencies holds much promise. As the global market for cryptocurrencies continues to grow, so too will the demand for alternatives to traditional cryptocurrencies — many of which are not backed by anything of value. Here are a few potential future developments to be expected over the coming years.

1. More Commodities: While gold has been the standard commodity for backing cryptocurrencies, it is conceivable that other commodities will come into common use. For example, oil, silver, or even agricultural products could be used as a basis for a commodity-backed digital currency.

1. Increased Regulation: Just as traditional cryptocurrencies are coming under increasing scrutiny and potential regulation — and in some countries an outright ban — commodity-backed cryptocurrencies are likely to come under similar scrutiny from regulatory bodies. This could lead to increased regulation and oversight, which may or may not be welcomed by users and investors.

1. Integration with Other Financial Instruments: Commodity-backed cryptocurrencies could be integrated with other financial instruments, such as exchange-traded funds (ETFs) or futures contracts. This could provide additional liquidity and make these cryptocurrencies more accessible to a wider range of investors.

1. Increased Adoption: As more people become aware of the potential benefits of commodity-backed cryptocurrencies, adoption is likely to increase. This could lead to greater demand, which could in turn drive up the price of these cryptocurrencies.

1. Algorithmic Trading Bots: As AI powered trading bots become more ubiquitous in the financial sphere, this technology may potentially be utilized to diversify the investing strategy of investors involved with commodity-backed cryptocurrencies.