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Thursday, July 17, 2014

The Truth About "Gold Backed" Cryptocurrencies

We say, "If you can't hold it, you don't own it."

Thursday, July 17, 2014

The Truth About "Gold Backed" Cryptocurrencies

Another day, another salesman tries to sell us the story that they are launching the first Gold backed cryptocurrency. On this occasion it's Anthem Vault (founded by Anthem Blanchard, son of well known Gold advocate Jim Blanchard):

Newnote Financial Corp. is pleased to announce the successful development and launch of the first open-source gold-backed alternative crypto-currency, commissioned by Anthem Vault Inc. Business Wire

So are they really the first? They certainly aren't the first to launch a "Gold backed" cryptocurrency. The first I recall reading about was NoFiatCoin (XNF) which trades on the Ripple Network and was launched earlier this year:

Click Chart To Enlarge

Despite this cryptocurrencies favourable return for early adopters, the claim that it's backed by Gold (bullion) is dubious. The company simply allows those holding the cryptocurrency to exchange it for precious metals they have in stock. As Michael Suede wrote shortly after the announcement of XNF:

NoFiatCoin says that only a 1/3rd of XNFs are backed by bullion and that the market will determine the price for an XNF.  To me, this doesn't make much sense.  This means an XNF does not represent a fixed weight of gold.  Further, NoFiatCoin says redemption of XNFs for bullion requires a minimum of $3000 worth of XNFs at current market prices.

If XNFs were actually a "gold backed" currency, each XNF would have to represent a fixed unit of weight.  For example, they could set an XNF to be worth .001 ounces of gold, and if you saved up 1000 XNFs, then you could always exchange them with NoFiatCoin for an ounce of bullion.  Of course, under this system, it would be impossible to have a fixed limit of currency creation, and there would have to be a way to take XNFs out of circulation once they were redeemed for physical specie.

Without convertibility at a fixed ratio with the coins, how is this Gold backed?

Other cryptocurrencies purporting to be Gold backed include Gold Backed Coin (GBC) which also trades on the Ripple Network, they suggest that each of these coins is backed by 1/10oz of Gold. But what do we really know about this company and how or where they are storing the Gold that is supposedly backing all these coins? The domain for the website was registered only a few months ago.

Then there is Ripple Singapore which claim to be able to load your Ripple wallet with XAU (Gold), XAG (Silver) and XPT (Platinum) with the bullion backing these positions stored in Singapore by Silver Bullion Pte Ltd. Though take up doesn't appear strong, they published these audit figures on their website:

What is the benefit of storing these in your Ripple wallet? There's not much liquidity given the published reserves, why not just setup a regular unallocated account with the dealer? Not that I would recommend storing your precious metal that way either.

Further to those already mentioned there is also G8Coin, MinaCoin, XGOLD (a work in progress) and probably others that I've missed. None of these currencies really offer anything that hasn't been seen before in one form or another, for example E-gold was founded in 1996 and topped 5 million users before the Gold was eventually seized and company placed into receivership. Also, there are already online exchanges where one can buy precious metals electronically or trade peer to peer with other account holders, some of which are well established and trusted, such as BullionVault and Gold Money.
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