How to Speculate on the Price of Gold Using Cryptocurrencies

Table of Contents

• Invest in Gold-backed Tokens
• Trade Spot and Derivatives
• Buy Gold Using Cryptocurrencies

• Earlier this week, gold spiked to over $2,000 for the first time in history.
• The precious metal has been on the climb for more than two years straight, during which it has almost doubled in value, generating an incredible return for investors. 

Earlier this week, gold spiked to over $2,000 for the first time in history. The precious metal has been on the climb for more than two years straight, during which it has almost doubled in value, generating an incredible return for investors. 

Many investors continue to purchase bullion and other forms of gold investments for their portfolios. Besides being a hedge against economic crisis, gold has maintained its good value through the years. It can also be an excellent option for portfolio diversification and provide liquidity compared to other financial and physical assets.

Given these circumstances, gold is one of the preferred investment assets for many investors. Now, thanks to a cross-over between the traditional finance and cryptocurrency industries, investors can speculate on the value of gold using cryptocurrencies instead of fiat. 

Invest in Gold-backed Tokens

Arguably the simplest way to speculate on the price of gold is by purchasing gold-backed tokens. In essence, these are tokens that are backed by a fixed allocation of gold, such that owning each token is equivalent to owning a fixed amount of gold. 

The amount of gold each token represents varies from provider to provider, but most stick with a ratio of 1 token equals 1 gram of pure investment grade gold. As such, the value of each token is usually roughly equivalent to the gold spot price, though it can fluctuate based on the economics of supply and demand, and several other factors. These tokens can usually be bought directly from the company or from third-party exchange platforms and can be traded or redeemed for real gold whenever the holder chooses. 

Aside from knowing how to determine the value of a gold-backed token, it may be best to familiarize yourself with the advantages of investing in this type of token. One of the biggest advantages of gold-backed tokens is that they have less volatility compared to cryptocurrency investments. In a traditional market, gold can be used as a hedge against inflation and other unfortunate market conditions. This scenario can also be applied to the cryptocurrency market, making gold-pegged tokens less volatile.

Buying gold-backed tokens can also eliminate storage complications. Generally, owning gold at home comes with safety risks, and using a third-party storage facility can be costly on your end. But with the advent of gold-pegged tokens, storage is no longer complicated because they enable physical gold to be purchased with ease and affordability. When it comes to transferability, you can simply transfer your gold-backed tokens’ contract over, and the transaction is complete without any problems.  

With all that said, gold-backed tokens are the trend now in the investment world. However, though there is a wide range of gold-backed tokens available, it’s also important to ensure that the ones you’re investing in meet certain basic criteria. 

The platform should offer a system to easily verify that it has sufficient gold in reserves to back the circulating supply 100%. CACHE Gold (GCT), for example, allows users to easily check how much gold it has in each of its vaults, with its GramChain® asset tracking system. Other platforms typically rely on irregular allocation reports to demonstrate their gold reserves.

Beyond this, you should also consider the minimum redemption amount — or the minimum number of tokens that can be redeemed for physical gold. For CACHE Gold, this is 100 tokens (100 grams), whereas for Tether Gold (XAUt) this is 430 tokens (430 troy ounces). 

Trade Spot and Derivatives

For those looking to profit from the day-to-day fluctuations in the price of gold and gold-backed tokens, there’s also the option of trading gold derivatives and gold-backed tokens on a variety of cryptocurrency exchanges. 

Gold-backed tokens can be traded on most popular cryptocurrency exchanges. (Image: Huobi Global)

Trading gold-backed tokens is no different from trading any other cryptocurrency. Once purchased, these tokens can be transferred to any cryptocurrency spot exchange that supports the cryptocurrency, where they can be traded against other cryptocurrencies or against fiat (where supported). Traders will then be able to capitalize on fluctuations in the token value as a result of changes in supply and demand, and the gold spot price. 

It’s also possible to trade a variety of gold derivatives using cryptocurrencies. These are essentially contracts that allow traders to speculate on the price of gold without actually purchasing or holding any gold or gold-backed tokens. These are typically considered more advanced financial instruments, however, since they can usually be traded with leverage — which can dramatically improve profits (or losses). 

Buy Gold Using Cryptocurrencies

Arguably one of the simplest ways to invest in gold and other precious metals is by simply purchasing physical gold bullion — essentially investment gold in the form of bars, ingots, and coins, using cryptocurrencies. 

Depending on where you live, the range of gold products available to you can vary considerably. Some of the more popular websites, including Money Metals and European Mint, offer a range of investment gold, ship worldwide, and accept payment in Bitcoin (BTC). Others, such as Bitgild and JM Bullion ship to a restricted range of countries. 

Though buying physical bullion with gold is a relatively simple endeavor in 2020, there are some downsides to the practice. For one, you’ll usually pay above spot price for the gold. This can range from just 1-2% above spot, to potentially much more depending on the vendor you choose. You will also likely need to pay shipping and insurance costs, which can become quite costly if you’re shipping large quantities of gold internationally. 

Physical gold also isn’t particularly liquid. This means you want to be able to liquidate your holdings easily, such as for trading purposes, or to capitalize on a temporary decline in value before buying back in. This is part of the reason why gold-backed tokens have achieved such popularity as an alternative.