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February 16, 2021
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Gold beside bitcoin? The blockchain world has room for both

Bitcoin is being spoken of with increasing frequency in connection with a certain precious metal. And thanks to blockchain technologies, one can invest in it directly in a relatively decent manner. There are two main innovative roads one can take – tokenized or synthetic assets. Let’s take a closer look at how blockchain technology and gold are interrelated.

There are many reasons for comparing bitcoin to gold. The idea of a maximum quantity of 21 million bitcoins is becoming increasingly popular at a time when central banks are printing money at a remarkable rate, and national debt is constantly growing.

From an historical perspective, however, even gold didn’t have unlimited availability. Over the past hundreds years, the quantity of gold in circulation has increased approximately tenfold. In the case of bitcoin something similar is impossible, and hence it is the first financial instrument that has fixed and guaranteed supply. Other major advantages of bitcoin over gold are lower storage costs and easy transfer – it’s basically like sending an email message.

These days, increasing numbers of investors are seeing these benefits and admitting that bitcoin is becoming the gold of the twenty-first century. For example, JP Morgan notes that bitcoin’s market cap could increase up to $2.7 billion ($146,000/bitcoin), which is the amount represented by private sector investments into gold (source).

Thanks to blockchain technology, however, it is also possible to gain exposure to gold as such. There are currently several projects focusing on gold that runs on blockchain. The main method is tokenization of physical gold, with the key players in the project being Paxos (the PAXG token) and Tether Gold (the XAUT token). However, exposure is also possible through so-called synthetic assets. Here, the sXAU token plays the main role. The gold token is traded among other synthetic tokens on the Synthetix Exchange.

The PAX Gold (PAXG) token, which is backed by physical gold, is issued by Paxos Trust Company, regulated by the New York State Department of Financial Services (NYDFS). The token is fully backed by gold in audited vaults, and is fully convertible to physical gold. Basically, it’s an instrument similar to ETF funds that are investing into gold – but in this case, instead of a share certificate, the investor owns a mobile digitized investment instrument (token), which he can then use in the ecosystem of automated digital financial services leveraging blockchain technology. The current price of a PAXG token is $1825 (source) and is very close to the price of gold on traditional markets, where one troy ounce (XAU) is trading at $1810 (source).

The PAXG token can for example be purchased on exchanges like Binance or Uniswap, which is part of our Rockaway Blockchain Fund portfolio. PAXG derivatives, such as contracts expiring on March 26, can be purchased on the FTX exchange, for example. As at today’s date, investors are trading around $14 million worth of this token daily on spot markets.

And what about the second aforementioned method – synthetic assets? These – specifically sXAU for example – can be compared to a decentralized derivative with cash settlement, where the counterparty isn’t another investor, but an automated smart contract written in code. As of today, investors are trading around $18 million of this token on a daily basis. sXAU can, for example, be purchased on the 1inch exchange – which, by the way, is also a part of the Rockaway Blockchain Fund.

Blockchain-based tokenized or synthetic gold has additional advantages. The main one is simplicity: anyone with a smartphone and an internet connection can buy PAXG or sXAU via the aforementioned exchanges.

Another advantage is the fact that they can be freely bought and sold during hours when traditional markets through which investors usually invest into gold are closed. For example GLD, the most popular ETF fund, is traded only between the hours of 3:30 p.m and 10:00 p.m. CET.
Another advantage is the fact that most “gold” tokens run on the Ethereum blockchain. They are thus integrated into popular blockchain applications, and investors can borrow or on the contrary earn interest against the token (source). Alternately, they can be used to easily provide liquidity on centralized exchanges, potentially earning additional income.

Compared to futures contracts, tokenized gold has a major plus in that companies issuing gold-backed tokens assume the cost of storage, and merely charge a fee when it is converted into physical gold. Therefore, if an investor isn’t planning to convert the token to gold, it is more advantageous to invest in the token and thus avoid storage costs, which under normal circumstances are included in the price of futures contracts (contango). In the case of ETF funds, these are transferred to the investor through annual fees of 0.18 – 0.4 % of the invested amount.

The stored gold represented by the aforementioned tokens (PAXG, XAUT, and sXAU) is worth approximately $200 million, and has increased by 33 % since the beginning of August 2020. The volume traded of these tokens is $380 million per month. This yields an increase of 442 % since the beginning of August.

In Rockaway Blockchain Fund, we are mainly monitoring the manner in which physical assets are being tokenized as well as how the intersection of the blockchain world with physical assets is being addressed. One opportunity that we see involves the tokenization of invoices, cash flow from real estate, or any other cash flow, something that Centrifuge is focusing on, for example. For us at this point, the narrative of gold as an investment instrument that is not correlated to other asset classes is represented by bitcoin in the digital world. Nevertheless, all three of the above mentioned projects show that there is interest in tokenized commodities, and that tokenized gold will undoubtedly find its place in the new world of finance that is currently being built.

About the Author

David Rakusan, CFA is responsible for portfolio management at Rockaway Blockchain Fund. He gained experience as an Investment Analyst at RSJ Investments (€500M AUM), where he was responsible for analyzing both direct investment opportunities and indirect fund of funds investments in the VC sector. David holds a CFA charter and a Master’s Degree from the University of Birmingham.