Last week during a blockchain event I spoke with a nice friend who is going through this process of tokenising Gold.
We had much in common and I've decided to spread this knowledge.
Get ready, I will go into some details, nothing too impossible to understand but neither too light to be useless so hold tight and have fun reading this article.
Let's start by saying that gold has always been considered a safe haven investment, especially during economic uncertainty.
However, as you may know, investing in physical gold can be expensive and difficult to manage.
And guess what...That's where tokenized gold comes in!!!
Basically, tokenizing gold is the process that lets you create "digital tokens" representing ownership of physical gold, making it easier and more accessible for investors to buy and trade gold.
For a few of you who might decide to ask yourself:
Why Investing in Tokenized Gold?
Well, tokenized gold has several advantages over traditional forms of gold investment, and if you have been reading my previous articles, you might have seen that all those assets have something in common.
Reasons for investing in tokenized gold:
Accessibility - Tokenized gold provides an easier and more affordable way to invest in gold. Traditional gold investments require significant capital and often come with high fees for storage, insurance, and transportation.
Liquidity - Tokenized gold can be traded on digital exchanges, providing investors with the ability to easily buy and sell their investments. This can lead to increased liquidity, making it easier to enter and exit positions.
Security - The tokenization of gold is often done through blockchain technology, which provides a secure and transparent way to verify ownership and transfer of the tokens.
Diversification - Gold is often considered a safe haven investment, providing a hedge against inflation and economic uncertainty. By investing in tokenized gold, investors can diversify their portfolios and potentially reduce risk.
Obviously there are disadvantages, let's have a look...
Disadvantages of Investing in Tokenized Gold:
Before moving forward let's tackle the elephant in the room
While investing in tokenized gold can offer several advantages, there are also some potential disadvantages that investors should be aware of:
Market Risk - The value of tokenized gold is still subject to market volatility and risk. The price of gold can fluctuate rapidly based on market conditions, geopolitical events, and other factors, which can impact the value of tokenized gold. Therefore I want to make it clear that it is NOT solely related to the gold per se.
Counterparty Risk - Tokenized gold is typically held by a third-party custodian or issuer, which means there is counterparty risk involved. If the issuer or custodian goes bankrupt or becomes insolvent, investors may lose their investment.
Regulatory Risk - The regulatory environment around tokenized gold is still developing, which means there is uncertainty about how it will be regulated in different jurisdictions. This could impact the ability of investors to trade and hold tokenized gold.
Technical Risk - Investing in tokenized gold requires a basic understanding of cryptocurrency and blockchain technology. There is a risk that investors may make mistakes in the purchasing or storage of tokenized gold due to technical difficulties.
How to Invest in Tokenized Gold?
Investing in tokenized gold is similar to investing in any other asset on a digital exchange. Here are the steps you can follow to invest in tokenized gold:
Choose a platform - Please very important: Look for a reputable platform that offers tokenized gold investments. Some popular platforms include Digix, Paxos, and Tether Gold.
Create an account - Sign up for an account on the platform of your choice. You'll need to provide some personal information and verify your identity.
Fund your account - Transfer funds to your account using a bank transfer or credit card.
Buy tokens - Once your account is funded, you can buy tokens that represent a share of ownership in the gold held by the platform. The price of the tokens will be based on the current market price of gold.
Monitor your investment - Keep track of the price of the tokens and monitor any news or market developments that may impact the price of gold.
Return on Investment
The return on investment (ROI) for tokenized gold will depend on several factors, including the price of gold, the fees associated with the platform, and the performance of the cryptocurrency market. In general, the ROI for tokenized gold is likely to be lower than the ROI for other cryptocurrencies, but higher than the ROI for physical gold.
Let's see why:
The return on investment for tokenized gold can be different from other cryptocurrencies due to the underlying asset's intrinsic value. Unlike most other cryptocurrencies, tokenized gold is backed by a physical asset with intrinsic value. This means that the price of tokenized gold is less likely to experience extreme fluctuations in price as it is tied to the value of gold. Therefore, the return on investment for tokenized gold is likely to be lower than the ROI for some other cryptocurrencies that are more speculative in nature.
However, the return on investment for tokenized gold is likely to be higher than the ROI for physical gold due to the ease of buying and selling tokenized gold. Physical gold investments often come with high transaction fees and require additional storage and insurance costs.
Tokenized gold, on the other hand, can be bought and sold easily through cryptocurrency exchanges with lower transaction costs. Therefore, tokenized gold investments can offer higher returns compared to physical gold investments.
Another factor that can impact the ROI for tokenized gold is the supply and demand for the asset. If the demand for tokenized gold increases, it can lead to an increase in price and a higher ROI. Similarly, if the demand for tokenized gold decreases, it can lead to a decrease in price and a lower ROI.
It is worth noting that the ROI for any investment, including tokenized gold, is not guaranteed and can be impacted by a variety of factors such as market conditions, fees, and regulatory changes. Therefore, investors should carefully consider their own financial situation and risk tolerance before investing in tokenized gold or any other asset.
According to a recent study by Delphi Digital, tokenized gold has the potential to outperform physical gold as an investment. The study found that tokenized gold had a higher risk-adjusted return compared to physical gold, and could potentially provide better returns over the long term.
It is difficult to predict the return on investment for tokenized gold as it can vary based on market conditions, fees associated with the platform, and the performance of the cryptocurrency market. However, we can look at historical data and make some assumptions about potential returns.
Over the past 10 years, the price of gold has increased by an average of 10% per year. If an investor had invested $10,000 in physical gold 10 years ago, their investment would be worth approximately $26,000 today.
When it comes to tokenized gold, the returns can be similar but may vary depending on the platform and the fees associated with it. For example, let's assume an investor buys tokenized gold on a platform with a 1% fee and holds onto it for one year. If the price of gold increases by 10% during that year, the investor's return on investment would be approximately 9% or $900 on a $10,000 investment.
It is worth noting that the cryptocurrency market is highly volatile and can impact the performance of tokenized gold. In addition, regulatory changes and technical difficulties can also impact the value of the investment.
Ultimately, the return on investment for tokenized gold will depend on a variety of factors and may not be predicted with certainty. Investors should carefully consider their own risk tolerance and do their own research before investing in tokenized gold.
Conclusion
Investing in tokenized gold can be a great way to diversify your portfolio and potentially reduce risk during economic uncertainty. By choosing a reputable platform and monitoring your investment, you can take advantage of the accessibility, liquidity, and security that tokenized gold provides. While the ROI for tokenized gold may not be as high as other cryptocurrencies, it can still provide a solid investment opportunity for those looking to invest in gold and diversify. Russia’s Sberbank tokenized gold as a digital asset back in January 2023.
I will try to work on some numbers throughout this week to compare tokenised gold and tokenised real estate.
Thank you for reading my article, I hope you enjoyed it. Let me know what you think.
Thanks
Alessio
Disclaimer:
Absolutely, it is important to note that I am not a financial advisor and the information provided is for educational purposes only. The content presented in this post is not intended to be taken as financial advice, and readers should consult a qualified financial advisor before making any investment decisions. Investing in tokenized gold carries risk and potential for loss, and investors should carefully consider their own financial situation and risk tolerance before investing. Any investment decision made by a reader of this post is solely their own responsibility.
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