Digital Gold vs Gold ETF's

The first question we receive when evaluating gold as an investment opportunity is: Is it worth investing in ETFs or Gold-backed Crypto? These are our considerations.


First a bit of clarity: There are both cryptocurrencies and tokens backed by gold. The difference.


Gold-based cryptocurrencies are digital currencies tied to a certain weight of gold, usually expressed in ounces.

The token could be described as the same thing but with one key difference: it is not redeemable.


At first glance, one could argue that cryptocurrency is better, as it can be converted into physical gold, but this brings with it a number of problems, which in our view are crucial. To mention the main ones:

  1. You need to own the exact amount of cryptocurrency related to the physical gold you want to buy back;

  2. Selling the cryptocurrency means incurring possible brokerage costs and certainly receiving a purchase price that could be considerably lower than the LBMA's;

  3. The cryptocurrency that enables redemption becomes a potential money laundering vehicle and therefore financial institutions may see it linked to a high risk client and make suspicious reports;

  4. The cryptocurrency was created as a mean of payment and therefore with rules and costs that are fundamentally different from those of a token that has a store-of-value purpose;

  5. The cryptocurrency was born as a Stablecoin and therefore in the future (it is already happening with the US treasury) it could be subject to heavy regulation in order to avoid money laundering and systemic risks of use (see point 3 here above).


This is why we suggest focusing on store-of-value tokens and thus created EXAU Gold. A token that has the specific purpose of providing a digitization of physical gold, while maintaining the essential qualities that we will examine below.


What is a Gold ETF


A gold exchange-traded fund (ETF) is a commodity ETF that consists of one main asset: gold.

ETFs are similar to shares and trade on exchanges in the same way.


The main aspect of a gold ETF is the derivative underlying the investment, i.e. the "contract between two or more parties whose value is based on an agreed underlying financial asset". Gold ETFs hold gold derivative contracts that are backed by gold.


Thus, when someone invests in a gold ETF, they do not actually own any gold, but are buying a share in a centralised product (the fund) that represents physical gold. The objective of an ETF is to give the investor exposure to the price movements and/or performance of gold.


Differences


Seen in this way, one could say that the difference between an ETF and a Token that has physical gold as its underlying asset is minimal.

However, this is not the case. Pros of the Token are:

  1. Custody Fees: With a gold-backed token, investors do not need to have a specific account to hold what they have purchased. The custody of the token can take place in a standard digital wallet that supports the relevant blockchain (There are dozens of these in the Apple and Google stores and they are free). This greatly reduces the cost of holding the token;

  2. Portability: Since the token is not tied to any financial institution, it does not require portability and has no third-party risks;

  3. Transferability: When the holder decides to transfer his investment or part of it to a third party, he simply has to send it to a new third-party wallet address. It happens in fractions of a second, 24/7 and has no costs;

  4. Accessibility: With gold ETFs the difficulty that individuals in remote parts of the world have is the link to the bank that distributes it and the investment process that requires a trading account and converting their currency into a foreign currency. The process goes on and each step takes at least a day to complete, with various fees, costs and commissions;

  5. Usability: Tokenised gold also provides a way to make gold a medium of exchange again. Conceptually, a token can function as an exchange currency without being officially one.

  6. Geographical Barriers: No territorial barriers for any investor;

  7. Liquidation of the ETF: There is no risk should the ETF be liquidated but, as it is managed by the regulators, it triggers the event of redemption and therefore forced tax declarations in the event of capital gains even in periods that these may not be convenient.

Cons of the Token are:


  1. Exchangeability: At present, ETFs are traded on official and certainly more reputable markets while tokens are traded on secondary markets that are often based in jurisdictions that are not always transparent in tax matters.

  2. Leverage: A gold ETF can be immediately collateralised by any broker whereas tokens are still too new in concept to be accepted by the majority.


Recap


Traditional ETFs are out of reach of many retail investors worldwide and can only be purchased with traditional currency.


Gold-backed tokens, on the other hand, are easily accessible and cheaper to purchase. There is no need for a broker to buy tokens, they can be purchased via cryptocurrencies and individuals can buy a fraction of a token.


Gold ETFs came onto the market in 2003 and have become one of the most innovative products of the last 15 years.

The launch of gold ETFs was initially met with an enormous amount of scepticism. Most, if not all, of the sceptics were proven wrong.


It is clear that this new approach to investing in gold will be subject to the same scepticism, but it will probably prove even the sceptics wrong in the near future.


Last but not least, EXAU Gold is a token issued by Ephelia Capital, a licensed asset manager based in Switzerland. A guarantee of solidity and expertise.


For more info please do not esitate to contact our team at sales@epheliagroup.com to discuss about EXAU Gold token