A new gold bullion product from crypto exchange traded products provider Coinshares threatens to shake up the gold market.
The DGLD “digital gold” token, slated to start trading imminently, is backed by gold bullion held in Swiss vaults and runs on top of an infrastructure that leverages the bitcoin network to record transaction history.
Coinshares has partnered with MKS, a Swiss leader in bullion storage and fabrication and London-based Blockchain.com, one of the oldest crypto wallet providers in the industry with arguably the largest active wallet infrastructure.
Each DGLD token is the digital equivalent of a tenth of a troy ounce of gold. Before a token can be created, the necessary amount of LBMA [London Bullion Market Association] gold must be allocated and placed in the MKS’s vault.
Coinshares claims its product has a number of advantages over traditional gold offerings.
Opening up gold trading?
First, the “tokenisation” of the asset makes it much more easily transferable and therefore tradeable.
Second, when compared to exchange traded funds (ETFs) that have grown in popularity as a cheap way of accessing asset classes, gold included, it has the advantage for the owner of conferring direct control over their property via the legal title to the gold.
Third, the digitisation of the asset means it dispenses with the need for the layers of intermediaries necessary with ETFs, especially synthetically replicated types where counterparty risk is an additional hazard.
Against these considerations, its association with cryptocurrencies may well scare off many mainstream investors.
Also, security issues regarding token custody would likely be a major concern for mainstream investors, as well as the availability of insurance to cover loss or theft.
In a statement accompanying the announcement of the DGLD network launch, Danny Masters, chairman of Coinshares, explained: “DGLD combines the stability of the world’s most enduring asset, gold, with the security of the world’s most resilient network, Bitcoin. You can now have the peace of mind of Swiss-vaulted physical gold, with the same convenience, but not the same layers of middlemen, as owning a gold ETF.”
In a recent podcast for Money Observer’s sister website, interactive investor, Masters spoke about DGLD’s other unique selling points.
It’s very much pros-only at the moment, with a launch on blockchain.com’s The Pit high-frequency exchange imminent, where over-the-counter trading will take place.
For mainstream retail investors the DGLD token is scheduled to become available by the end of the first quarter of 2020.
Crypto associations could be a problem for DGLD adoption
Aside from the crypto association, the new technology aspect is in itself something of a barrier to entry for many investors. Setting up the wallet to store the token and securing it could be a big ask for the ordinary investor.
Masters insists access for the consumer market “will be very smooth but is not there yet”.
“We will not see the full feature set until the first half of the year with the blockchain.com wallet. There are different levels to which you can entrust blockchain.com to look after your keys or otherwise,” he says.
The crypto industry has been its own worst enemy when it comes to security, and with South Korean exchange UpBit hacked to the tune of $50 million worth of crypto yesterday (27 November), adoption of Coinshares’ DGLD token may be held back as a result.
Routes into gold beyond crypto
The DGLD token is not to be confused with the VelocityShares 3x Inverse Gold ETN that trades on the Nasdaq exchange with the ticker DGLD.
In October ETF provider WisdomTree published a report for its professional clients entitled Bitcoin: It’s Time to Seize the Opportunity.
If some of WisdomTree’s clients had bought at the time of the report’s publication, their holding would now be in the red because bitcoin was trading at six-month lows up until two days ago, although has bounced back a little to trade at $7,562, 45%, off its high for this year at $13,800.
WisdomTree is the provider of the WisdomTree Physical Gold ETF with $7.1 billion in assets and is Europe’s largest provider of gold exchanged traded products.
ETFs and other traditional collective vehicle routes into gold, such as funds and investment trusts, will be difficult for newcomers to supplant, not to mention the abiding attraction of buying bullion direct from gold dealers.
One fund that has delivered handsomely for investors is the LF Ruffer Gold fund, a 2019 Money Observer Rated Fund. It has returned 41% over one year and 128% over five. The fund invests in gold mining and exploration companies, with its top two holdings Centerra Gold and Kinross Gold.