Gold ETFs Vs Gold Backed Tokens: What's The Difference?

Gold has been a valued investment vehicle for thousands of years, and now there are more options than ever for adding it to your portfolio. One of the newest ways to invest in gold is gold-backed tokens on cryptocurrency networks. 

So what are the pros and cons of investing in a gold-backed token? Is it safe? How do gold-backed tokens compare to ETFs?

This article will answer all these questions and more. 

What Is A Gold-backed Token?

A gold backed token is a lot like an ETF— it’s a certificate that represents ownership in physical gold. Just like an ETF, a gold-backed token issuer holds gold in a vault and then issues certificates to investors that can be sold or redeemed for gold. 

The main difference is that instead of issuing shares through the Securities and Exchange Commission (SEC), gold-backed tokens are issued on a cryptocurrency network like Ethereum.

This concept, called tokenization, is being applied to just about everything, including real estate, corporate equity, and even rights to popular songs. 

Blockchains earned their hype through the ability to issue secure, immutable digital certificates. These certificates can represent just about anything— including gold. 

What Are The Advantages Of Gold-backed Tokens?

Gold-backed tokens have a number of advantages over gold ETFs. 

• Lower fees. The average ETF has transaction fees ranging from $8-30, and annual maintenance fees of around 0.4%. Gold-backed tokens allow you to include gold in your portfolio at a much lower cost. 
• More control over your funds. ETFs usually require you to have a brokerage account, and changing to another broker can be difficult. You can easily send tokens anywhere in the world and store them anywhere you want— including under your mattress. 
• More privacy. Governments in some jurisdictions don’t have a good track record of respecting their citizen’s property rights. Hackers can also access financial records from big brokerages and use it to find victims. For people concerned about government overreach or data breaches, gold-backed tokens can be a more private way to keep a position in gold.

Disadvantages Of Gold-backed Currencies

Gold-backed tokens may not be right for everyone. They also come with some serious disadvantages.

• Less regulation. Token regulation is in its infancy, so the companies managing gold-backed tokens may not be held to high standards like ETF issuers. 
• More technical knowledge required. Holding and trading tokens requires learning how to use the technology and sometimes managing your own currencies. Accidents can and do happen and sometimes people lose their funds. You can outsource this to custodians, but you need to choose carefully as not all are reliable, as the collapse of FTX last year showed.
• More risk. Not all token issuers are equal. Unlike ETF issuers, they might not be insured and do not all go through a government approval process, and there is risk that they could go under and lose user funds. It’s important to be careful and do your research before investing in a gold-backed token. 

Great Potential For The Right Investor

Gold-backed tokens will not appeal to everyone. Many investors prefer the security of knowing that their investments are heavily regulated and controlled by the government. That security comes with a price, however, both in terms of higher fees and less flexibility. 

For those who are already familiar with cryptocurrency or who are willing to learn, gold-backed currencies can be a useful addition to a well-rounded portfolio. They are less subject to inflationary risk like fiat-currency stablecoins, and they don’t have the volatility of decentralized cryptocurrencies like Bitcoin. 

In the hands of a well-informed investor, gold-backed tokens have the potential to combine the best of both worlds— the innovation, speed and flexibility of cryptocurrency, and the stability and reliability of one of the world’s most trusted assets.