Editorial Graveyard- Part IV: Opinion Piece- Gold-Backed Stablecoins Solution to Bitcoin’s Instability

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In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value; for the year and 35% within June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

There is a digital currency alternative that is not only less volatile; but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. It is possible to have gold-backed private money, that blends the advantages of cryptocurrency with the value stability and historical salability of gold. Effectively, the best of both worlds, adopting the best attributes of both monetary assets.

What are Stablecoins?

The term stablecoin is thrown around, but what is it? It is a digital currency with value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability throughout human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. The reserve ratio requirements for gold to token backing and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilize Ethereum-based smart contracts.

Gold-Pegged Stablecoins Offer a Superior Value Proposition 

The most notable difference between Bitcoin and a stablecoin like Tether Gold is the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and fluid cross-border payments conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Gold-Backed Stablecoins Are More Stable Than Unbacked Cryptocurrencies:

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence.

The Convenience of Gold Collateralized Stablecoins:

When compared to physical gold and ETF gold funds, gold-backed stablecoins have a greater degree of convenience. Gold-backed stablecoins are frequently compared to ETF Gold Finds, but “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..” While redemption in fiat currency was maybe more convenient from the standpoint of liquidity, most users are opting to obtain a currency with no instinct value (prior use). Even though those that opt to invest in gold stablecoins, there are inherent counterparty risks.

In comparison to physical gold and ETFs the ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. Plus, the unencumbered cross-border transactions make it an excellent universal medium of exchange. 

Many people may still hold a healthy amount of skepticism regarding stablecoins tied to reserves of gold. After all, there requires a high degree of institutional trust for such an arrangement to transpire. However, this may be the last shot we have at establishing a gold standard. The political interest to maintain current easy money policies is too tempting for the Federal Reserve and politicians to maintain. Beyond the macroeconomic goals of full employment and price stability, Fiscal QE can be used to fund government projects ranging from wars to universal basic income, making irresponsible monetary policy a tempting lever for political gain. In the post-Bretton Wood era, the only way to avoid the bargaining chip of an elastic money base is privacy money with fixed commodities controlling the overall monetary supply. The political interests are so strong even if we had Ron Paul in the Whitehouse, easy money types would get their way on fiscal and monetary issues. The only way to ever obtain a gold standard will be from a private monetary regime.

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 3)

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The Benefits of Gold-Pegged Stablecoins?

Most of the white papers of the existing gold-tied stablecoins exalt the perks of digital currency backed by the world’s most enduring monetary commodity. Many claim the benefits of  1:1 token to gold-backinglow transaction feesa safe-haven hedge against instability and inflationlow buy-in requirementslow transactional costs for people living in remote areas, and the positive aspects of combing blockchain technology (convenience, decentralization, and honest record keeping) with the enduring value proposition of gold. While all these qualities are maybe enticing, the best way to demonstrate the superiority of golden stablecoins would be to compare them to other similar alternatives. 

Standard Cryptocurrency vs. The Midas of Digital Money

The most notable difference between Bitcoin and a stablecoin like Tether Gold would be the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and internationally fluid payment system conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence. 

Gold-Backed Stablecoins and Gold ETF Funds

Gold Stablecoins are frequently compared to Gold ETF Funds which are the darling of derivatives markets. Despite the criticisms of experts, there are some advantages that gilded Stablecoins hold over ETFs. Gold ETFs are essentially investment funds possessing gold-related assets. One key attribute distinguishing ETFs from their blockchain-based cousins is the fact that “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..”. In terms of liquidity, this may be a bit more simplified than cashing out a share of a gold-backed stablecoin token, as most stablecoins redeem in gold specie. However, if the point is to obtain money of “high intrinsic” value, the ETFs have to trade easy liquid for lesser money (fiat currency), in return. It would be dishonest not to bring up that gold-tied stablecoins do have counterparty risks, but that is a chance anyone takes with any third party holding precious commodities in their care. 

ETFs are purely intended to function as a speculative asset, while in contrast, the smooth settlement and distributed ledger and nationally agnostic nature of blockchain structure make tokens like Pax Gold or Tether Gold better suited for use as a medium of exchange. In all honesty, this will probably best bet for re-establishing a gold standard in the post-Bretton Woods era. The political interests of Federal Reserve officials, banks, and politicians are too embedded in the empty promises of easy money policies of the post-2008 U.S. Monetary regime. The temptation lurks for utilizing Quantitative Easing, bent beyond purely macroeconomic objectives (full employment, price stability), to fund the ends of fiscal policy. (Fiscal QE). The temptation of gesturing such a powerful bargaining chip such as open purse strings would make the idea of a fixed money supply more of an obstacle than a virtue. The number of people who stand to benefit from the current monetary policy of using collateralized debt as money makes a gold standard wide-eyed opium dream. Any transition to gold-backed currency; must come from a private currency; no government would ever revert to such a barbarous relic. It doesn’t matter even if the “End the Fed” crowd gets Ron Paul or Dave Smith in the Whitehouse, a meat grinder of the political process will drown out any monetary reforms. 

The Benefits Over Physical Gold

Beyond the benefits of tokenized gold lending itself as a medium of exchange from blockchain technology, it is worth noting that most transactions are now digital. The ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. 

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 1)

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In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low; in late 2020. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value for the year and 35% within the month of June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

Although there may be a digital currency alternative that is not only less volatile but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. Now it is feasible to have gold-backed private money that blends the advantages of cryptocurrency with the value stability and historical salability of gold. In the debate between gold aficionados and crypto enthusiasts, this is the ultimate compromise and is a far better alternative to fiat currency. In this series, I will detail the benefits of gold-backed stable coins and suggest that despite the volatility in the cryptocurrency market, tying digital assets to a valuable asset might strike a balance to create a better form of money.