Cryptocurrencies have a reputation for being highly volatile. This makes cryptocurrencies attractive for those who want to speculate on price movements.

Digital currencies also offer their users privacy and security, and enable them to make payment transfers faster (especially internationally), and without incurring large bank-assessed transaction fees. With the advent of digital wallets and similar technologies, they can be used in lieu of fiat currencies.

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However, crypto’s volatility makes consumers wary. The solution? Stablecoins.

What Are Stablecoins?

Stablecoins are digital currencies that are pegged to another (usually more stable) asset, such as commodities or fiat currencies. This helps prevent wild price swings in the value of these coins.

That provides a number of benefits for those interested in buying and holding rather than speculating.

Pegged and Unpegged Stablecoins

Most stablecoins are pegged to an asset or asset collection. But there are two ways this can be done.

  • When a stablecoin is hard-pegged, its value rises and falls in conjunction with the underlying asset.
  • If it is soft-pegged, mild fluctuations can occur. For example, a stablecoin might be 50% backed by US dollars.

In addition to pegging, stablecoins can be stabilized via algorithms. A standard mechanism is to allow the creation of more coins if the price rises or falls to a certain level.

The practice of manipulating a coin’s value by controlling its supply, however, is not as common as pegging. (Basecoin is an example of a coin (pegged to the US dollar) whose supply can be adjusted via algorithms.)

Stablecoins and Gold

Stablecoins backed by gold — like Paxos Gold (PAXG) and Tether Gold (XAUT) — are increasingly popular.

Each Paxos Gold or Tether Gold token represents 1 troy ounce of gold and both offer physical redemptions, which means you can take delivery of the gold you own, if you meet the criteria of each company.

These gold-backed stablecoins have received an influx of investors since the mid-March market meltdown. This isn’t surprising given that gold is traditionally viewed as a safe haven asset.

Gold as a Refuge

To be clear, in times of market turmoil gold isn’t necessarily seen as a profit-yielding investment as much as a strategy for preserving purchasing power. That said, some key announcements have highlighted gold’s potential.

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  • In a report titled “The Fed Can’t Print Gold” Bank of America projected that in 18 months gold will hit $3,000 an ounce.
  • Nine private banks controlling some $6 trillion in assets are advising their wealthy clients to park 5-10% of their assets in gold, according to Reuters.
  • Bloomberg reported that hedge fund founders Paul Singer, Crispin Odey, and David Einhorn are bullish on gold, based on recent letters they sent to investors.
  • Frank Giustra, founder and CEO of the Fiore Group and co-founder of the Clinton Giustra Enterprise Partnership has dubbed gold “the unfortunate, final refuge.”

Gold attracts investors who have a bearish outlook on the global debt bubble and massive money-printing by the Fed.

Why Use Stablecoins?

While the interest in gold is understood, you might be asking “Why bother with gold-backed stablecoins?”

There are certainly many ways to buy and invest in gold. For example there are:

  • Gold ETFs backed by bullion
  • Gold mutual funds
  • Gold mining stocks
  • Gold CEFs (closed-end funds) like the Sprott Physical Gold Trust (PHYS)
  • Services that sell and store gold like BullionVault.com and GoldMoney.com.
  • Online retailers of gold coins and bars, like Apmex.com .

Here are some key comparisons between gold-backed stablecoins and other methods of buying gold.

  • If you’re set up with a digital wallet and are familiar with using crypto for making purchases, it may simply be convenient for you to use PAXG or XAUT for buying and selling gold and converting it into usable currency when needed.
  • com has an analog: With its gold Visa card you can sell any amount of gold at any time and transfer it to your card for immediate use. However, GoldMoney.com now has a $10/month minimum storage fee which doesn’t make sense for small investors.
  • By contrast, with PAXG and XAUT there are no gold storage fees.

Taxation Considerations

For US investors, in most cases, when you’re investing in physical bullion, if you sell any amount of it after a year you’re going to be taxed according to the “collectibles” tax which maxes out at 28%. This is true whether you invested in a gold-backed ETF or bought coins and bars and had them shipped to your home.

You should consult reputable online sources and a tax professional to make sure you understand the tax implications of investing in gold.

Should You Invest in Stablecoins?

If you are wondering whether you should invest in stablecoins, the answer will depend on your goals.

If you are okay with risk and are looking to make sizable profits, stablecoins are not an appropriate investment vehicle for you. The point of these digital currencies (via pegging or supply control) is to minimize their price volatility.

Should You Invest in Stablecoins?

If, however, what you are looking for is a stable store of value with the perks of digital currencies, then stablecoins might be a good option for you. Buying such coins won’t guarantee you big profits but some of them might enable you to preserve your purchasing power in times of economic uncertainty.

If you opt for a currency that’s soft-pegged, there’s also the possibility of earning small profits.

That said, the primary purpose of stablecoins is to make digital currencies that are attractive to people for regular, everyday use. It will be a while before such coins are accepted enough for them to disrupt the fiat currency markets, but they are a start.

Summary

Stablecoins are digital currencies designed to have stable values via pegging or algorithmic design. Because they aren’t as volatile as most modern cryptocurrencies, they’re less appealing for speculators. But this makes them more attractive as alternatives to fiat currencies.

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