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Gold-Backed Crypto Currency

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  • Wed, Mar 14, 2018 - 11:09pm

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    davefairtex

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    Gold-Backed Crypto Currency

I’ve been noodling over the concept of gold-backed crypto for a while, and here are my thoughts; negative first, and then positive.

While I like the concept (insofar as I like a version of USDT that uses gold instead of USD, and that doesn’t have such a cloud hanging over it, and allows little people like me to actually take delivery), when you pick apart the physics of it all, you are left wondering how a 100% gold-backed crypto could possibly differ from an ETF.

The issues are both storage fees and blockchain-mining costs.  If a “coin” starts out by being backed by 1 gram of gold, over time, the backing has to drop, in order to pay storage fees and mining costs.  Miners don’t work for free and neither do vaults.  Effectively, the currency must “rust” over time, in some way, to pay for the costs of accounting and storage.  And – ultimately – that’s all blockchain is: accounting.  10 years later, you probably have 4-5% less gold backing your “gold-backed crypto” than you did when you started.

Of course, you can always lend your gold-backed crypto coins out at interest, but then you have the risk of not being paid back.  Likewise, you can deposit your coins at a place where other people lend them out – but there is that risk element again.

From the accounting perspective, you can implement your gold-backed crypto on the omnicoin platform – exactly like USDT – which piggybacks right on top of bitcoin.  That way you pay for your transfers using bitcoin.

Fundamentally, all these coins must be ETFs that just have the word “ETF” scratched out and the word “Crypto” hastily scribbled over the top.  Either that, or they aren’t 100% gold-backed.  And why would you put money into gold that didn’t result in you actually owning gold, considering how many other options out there (I’m looking at you, PSLV) that actually do have gold in a vault somewhere that you can take delivery of.

At the core, even a 100% gold-backed crypto currency must still be a warehouse receipt scheme, with the form of the warehouse receipt changing over to this digital key that is stored in a crypto wallet (with all the issues of losing said wallet) instead of some older-style mechanism, such as shares of an ETF, or physical gold vaulted with some storage site into which you must pay every year.  “All the fun of an ETF, with all the terror of ‘losing your wallet’ that bitcoin brings you.”

And why you’d buy into some of these ICOs at a discount – with the assumption that your $1000 would turn into $1300 of gold “later on” when the ICO actually ran out and bought the gold with the ICO proceeds – in what world could this perpetual motion machine actually work?  It relies on a bigger fool to come along and pay $2000 for $1000 in gold because it’s “crypto gold” – much better than actual gold, you see.

And if the crypto-gold holdings don’t “rust” over time to pay for vaulting, then there must be hidden risk in there somewhere.

Ok, so that’s the negative view, from the “cranky goldbug” viewpoint.  However, there are some positives.

One big new positive would be the relative ease of starting a crypto currency (versus the regulatory hurdles and single-exchange listing you get with an ETF), and the easy convertibility with the rest of the crypto world, which may bring with it the hope that your 100% gold-backed crypto (that financial physics tells you must “rust” every year) will eventually move into a big premium if/when big problems hit, because of its liquidity advantage and global reach – global reach absolutely must not be be underestimated, because somewhere in the world, there will be panic, or hype – as well as some hoped-for level of clueless behavior of the mass of crypto “investors” out there.

Can you see a 30-40% premium during a big “gold hype” and/or “gold shortage” situation?  I sure can.  The 2017 bitcoin top showed us that anything is possible.  As did the $50 silver top in 2011.

There are two more things: money laundering, and evading capital controls.  Both groups of people will gladly pay a premium to use crypto as a mechanism to move their money out of the country and/or launder their proceeds.  Imagine if you have stolen hundreds of bitcoins from some site, and you now have the prospect of turning that into a bunch of gold bars.  Gold-backed crypto should do a lot better than USDT, which is still in relatively widespread use even though there is some very sketchy auditing behind USDT that makes the COMEX look good by comparison.

[That’s a risk too; if gold-backed-crypto is too attractive to this group, that’s a vulnerability – giving an excuse to the legacy financial organizations – banks, exchanges, etc – to prod their tame regulators into trying to regulate it out of existence]

There are other possibilities that I could imagine: allowing miners to issue special smart contracts that offer gold-crypto at a discount (that promise to turn into actual gold-crypto 6, or 12, or 18 months from now) that requires the miners to fulfill the contracts by delivering actual gold to the vaults.  This allows the miners a way of publicly funding their mining operations.  These can be defaulted upon, so there is risk, and presumably they too can be traded, at a discount, just like bonds, but with limited liquidity.  This would dis-intermediate the banksters, which of course brings up that regulatory risk once again.

Here’s one list of gold-backed crypto I ran into.  You can get the sense that some of them are real scam-coins, while others sound more reasonable.  The one from the Perth Mint sounds interesting.

http://www.goldscape.net/gold-blog/gold-backed-cryptocurrency/

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