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.

So... Anthem Vault's new offering may be the first open source currency in this space (although some of those mentioned do trade on Ripple, which is an open source platform), but it's far from something new and exciting. Let's hear more about it though...
The virtual currency was secretly launched on the 4th of July 2014 by Anthem Vault’s technology team, in conjunction with Newnote Financial Corp. Dubbed the 4th of July Coin, this first Anthem Vault alt-coin is commonly referred to as MGC (Micro Gold Coin).

The MGC is an open source crypto-currency which means any person can download and look at the source code behind the coin, which is similar to Bitcoin. However, the coin has some unique attributes which sets it apart from Bitcoin. For example, there will only be a total of 10 million MGC’s in this series. All coins will be fully mined within one year, meaning all 10 million MGC’s will be in circulation and/or ownership by July of 2015. The entire series of MGC’s are backed by 100 grams of Gold stored at Anthem Vault, providing a base value to all MGC’s from the first moment the coins are “mined”. Business Wire
So the whole currency is "backed" by only 100 grams of Gold (spot value currently US$4192)? Based on 10 million coins, that means each coin will be worth 0.00001 gram of Gold. Talk about an anticlimax, this is nothing more than a marketing stunt designed to attract new customers to the brand or to have people write about it (game, set, match, they got me). Though according to the company founder this was only a taste of what's to come:
Blanchard said Wednesday's launch was a promotional offering, and the company has plans to offer a full suite of virtual currencies backed by a larger amount of gold as well as other precious metals at the end of September. Reuters
Let's face it though. Most of these "Gold backed" cryptocurrencies are a complete farce.

Those that aren't linked to a fixed amount of Gold, 100% backed and redeemable (by physical delivery of your Gold portion) I wouldn't consider to be Gold backed. Otherwise one could make the argument that any fiat currency is Gold backed (where the issuing country has official reserves), which is preposterous.

Those that are linked to a fixed amount of Gold, 100% backed and redeemable by physical delivery are illiquid or have been launched by unknown entities, not a system you want to be relying on for your exposure to Gold.

The reality is that combining cryptocurrencies with Gold doesn't make a lot of sense. The whole idea behind most cryptocurrencies is having a distributed electronic method of transferring value without the need to be tied to a physical location. Adding Gold to the mix literally destroys the advantages of a cryptocurrency because the asset it's tied to is stored centrally, leaving it vulnerable to the negative effects of government regulation.

If you want exposure to cryptocurrencies, then do some research, find one that fits your risk profile and take a punt.

If you want exposure to Gold, then buy it physically from a trusted source.

There's absolutely no reason at this point in time to try and combine these two very different assets.

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