Cryptocurrencies exist in the digital realm, which might make it seem like they’re backed by nothing. That isn’t the case at all. All digital assets are backed by something. Bitcoin, for example, is backed by the electricity that goes into validating and generating transactions on the network.
However, there are many other ways these assets are backed. Gold-backed cryptocurrency exists, and cryptocurrencies that are backed by other precious metals. Some are backed by the US dollar, while cryptocurrencies themselves back others.
This guide hopes to answer some of the questions you may have regarding cryptocurrencies and what they are backed by.
Cryptocurrencies and Backing
As mentioned, cryptocurrencies can be backed by a variety of things. To elaborate more on Bitcoin, that asset is backed by the mathematics that power the underlying blockchain technology. Each transaction must be verified so that no one can double-spend their assets. That way, the network remains stable, and bad actors cannot cheat it.
That said, more literal assets and commodities can back cryptocurrencies. In this case, we’ll discuss gold-backed cryptocurrency, specifically.
We’ve already stated that gold-backed cryptocurrency exists, but how? Essentially, the cryptocurrency ties itself to the current value of gold. If you hold the digital asset, you hold the value of gold. Why use this instead of traditional gold? Well, there are a lot of benefits.
The Pros of Gold-Tied Cryptocurrency
For one, assets like GoldCoin make acquiring gold much more accessible. Think about investing in gold bullion. Generally, you would need to acquire an entire bar, which isn’t possible for some budgets. Instead, you can invest in fractional amounts of gold, considering most gold-tied cryptos are equal to 1/1000th of an ounce each.
This opens up gold investment to all budgets, meaning you can invest even the smallest amount into the asset. The method is also cheaper than traditional gold investment.
If you buy gold bullion, you need to store it. This could come in the form of a safe in your home, which is expensive. If you don’t trust that, you can find a third party to store your gold. However, that’s asking for an endless monthly charge to keep your investment safe. The point is to make money, not spend more!
Cryptocurrency storage, for the most part, is free. After you invest, a cryptocurrency exchange will offer you a free wallet to store your assets. This isn’t the best way to keep them safe in the long term, but it’s a start. From there, you can utilize free software wallets to secure your assets.
If you get serious about your investments, you can purchase a hardware wallet — essentially a USB device — to store your cryptocurrencies. That way, your assets are stored offline when you’re not using them, which is ideal for long-term holders.
Gold-backed cryptos are also very easy to sell back by simply requiring the press of a button.
The Cons of Gold-Tied Cryptocurrency
Of course, while these assets sound appealing, gold-backed cryptocurrencies are not perfect.
We’ve already stated that these assets are left open to attack if stored online. It’s not like physical gold where someone must break into your house to acquire it. An exchange, however, can suffer a hack, and access to your assets will be gone. It’s not an ideal way to hold your money forever, and gold investors tend to hold for a while.
Also, many precious metal investors like to hold their physical investments. They want to touch them and make sure they’re real. While most legitimate gold-backed cryptocurrency groups hold public audits to prove their holdings, some can be scams.
Technically, these groups can lie about the gold they say they have. At that point, you’d be investing in literally nothing. Fortunately, these scams can be avoided with a bit of research, but they’re a threat nonetheless.
Hopefully, you understand a little more about how cryptocurrencies are backed and have value. This way, you can make safer investment decisions regarding these digital assets. Stay safe while trading!