Crypto tokens tied to gold, a traditional inflation hedge, continue to see solid growth as the spectre of stagflation hangs over the global economy.
Taken together, the market capitalization of the top gold-backed coins – PAX gold (PAXG) and tether gold (XAUT) – rose above $1 billion early this week, marking a 60% increase on a year-to-date basis, according to data provided by Arcane Research. The total market capitalization of all cryptocurrencies has declined 17.8% to $1.80 trillion this year, per chart platform TradingView.
"The rallying gold price seems to have attracted more crypto investors to the gold-backed tokens," Arcane Research said in a weekly note published on Tuesday, adding there are only two gold-backed tokens of considerable size: PAX gold and tether gold. One PAX gold and one tether gold represent one troy fine ounce of gold.
The precious metal has risen nearly 10% this year to trade above $2,000 per ounce. On Tuesday, prices narrowly missed the record high of $2,075 reached in August 2020.
The ongoing Russia-Ukraine war has sent prices of all oil, wheat and other commodities skywards, stirring up fears of stagflation – supposedly a best-case scenario for store of value assets like gold and a worst-case scenario for risk assets. Stagflation is a combination of red hot inflation and stagnant economic growth.
"Stagflation and gold are better bedfellows than anything you will read in '50 Shades of Grey,' and once gold comprehensively broke $2000.00 overnight, the rally accelerated sharply as expected. Gold rocketed 2.63% higher to $2,050 an ounce, edging slightly higher to $2,053 in Asia," Jeffrey Halley, senior market analyst, Asia Pacific, Oanda, said. "The stagflationary factors that are so supportive of gold are persisting and will remain so.
"Stagflation is a serious risk and a higher and longer inflation is close to a certainty," Singapore's Monetary Authority said early on Wednesday, according to ForexLive.
While the crypto community considers bitcoin an inflation hedge, the top digital asset tends to move or less in tandem with high-beta stocks, perhaps because it is also an emerging technology sensitive to expectations of monetary tightening by the U.S. Federal Reserve and other central banks. The cryptocurrency is down 2% this year.
"Bitcoin (BTC) has underperformed in this uncertain macro climate, but many investors still view it as an inflation hedge," Arcane Research noted. "Gold tokens can be helpful tools since they allow crypto investors to diversify inflation bets through familiar crypto market infrastructure."
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.