Market Overview

How I Separate The Good Cryptocurrencies From The Bad Ones


Over the past year I have spent more and more time diving into the world of crypto assets from a technological and investment point of view. Of course, my first experience in the space was the ‘gateway crypto’ Bitcoin (BTC), but I quickly explored other crypto assets of many different types.

Through researching many different tokens, coins, platforms, and projects I found what areas made the most sense to me as an investment:

·         Dominant crypto assets that have a large network effect and already have thousands of people working to make the technology better every day and more valuable. Bitcoin (BTC) and Ethereum (ETH) are the clear leaders here with network values of $150B and $86B respectively.

·         ‘DAP’ (Decentralized Application) Development Platforms that offer new technologies, more choice in programming languages, regulatory advantages, passive income potential, or some other niche use case that can still grow significantly. Examples here include Neo (NEO), Cardano (ADA), and Icon (ICX).

·         Crypto Assets with true ’real world’ intrinsic value. These are assets with backing from a physical asset with real intrinsic value. In the future, this area should flourish, but for now, this is a limited lot. I am, however, long two such assets in the space: DigixDao (DGD) and Xuarum (XAUR).

The appeal of crypto assets that can purposely combine the technological and decentralized nature of blockchain with the actual backing of physical valuable assets is obvious. I (and many others) believe this area of crypto is destined to be the largest in the space over time. Currently, several projects are starting down this road, but only a handful have made significant progress or already offering a physically backed crypto. Below is a summary of two promising projects; both using gold in different ways to add value for their asset holders.

DigixDao (DGD) 

This project aims to issue two types of tokens (at least for the time being). One type of token (DGX) is backed by 1 gram of 99.99 percent LBMA standard gold. This token is not yet available for purchase, but per the website is slated to be released by end of Q1 2018.

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You might be asking "Well that’s great, but why own this crypto token when I can simply buy physical gold or buy shares in a gold ETF such as SPDR Gold Shares (NYSE: GLD)?" Below are the advantages of gold meeting the blockchain…

·         Very little cost in acquiring access to gold value. It can cost between 5-20 percent of the purchase price to acquire physical gold, and if you want to sell it at some point, there can be a similar charge. Purchasing ETFs are much cheaper, but there is often a $5 to $15 commission to buy/sell. Fees for purchasing DGX shouldn't be more than 0.3 percent depending on how you acquire the tokens.

·         Storage/Tracking: If you buy physical gold, there is either a cost for a financial institution to store it or one must take it upon themselves to safeguard the investment. If you purchase an ETF, there is no storage issue, but many investors are skeptical, if push comes to shove, one could take possession of your gold through ETF form. It is also impossible to ‘track’ or know exactly what you own through the ETF.

With DGX and blockchain technology you always know exactly what you own and where it is located; in addition, it is always ‘guarded’ by the blockchain. If you wish, you can take possession of your gold in physical form.

·         Ease of transfer/purchases: If you own a gold ETF or a gold bar/coin, you cannot easily transfer this value to another person or purchase goods or other currencies for it. With DGX tokens, you can transfer the token to any other person on the planet for little cost and very quickly. In addition, over time you may be able to make everyday purchases through the value held with your DGX tokens.

The other token available currently through DigixDao is DGD. Owning this token is similar to owning shares in a company that sponsors a gold ETF and subsequently earning dividends from free cash flows. With this DGD token, the owner also has a vote in the overall community and earns a portion of fees generated from the DGX tokens.

Xaurum (XAUR

This project is more of a true ‘currency’ than anything else. This is about as close as one could get to being back on the ‘gold standard’ with a spendable currency. The XAUR tokens are meant to be a store of value and/or a means of exchange like Bitcoin and other fiat currencies with a couple important benefits.

First, each XAUR is backed by physical gold, but unlike DGX, the ratio of gold to XAUR tokens changes over time. And by the nature of the community blockchain, the ratio of gold per token should increase as more XAUR tokens are ‘minted’, gold is purchased for the community, and tokens are burned from transaction fees.

Per Rudi Potocnik at Xaurum, “When the market price [of XAUR] is higher than the production price [currently $0.315], the market is demanding new XAUR. Investors who buy at these levels [produce ‘excess value’] and that value is used to purchase gold and therefore increase the Xaurum gold reserves.” Right now there are 127M XAUR tokens in existence, which are backed by 129kg of gold. Per the website, the ratio of gold to XAUR tokens has increased 227 percent over the past year due to market demand. Transparency is very important here too, with daily published gold reserve audits and continuously updated XAUR information available on the website.

This is a very interesting project, which has the potential to be one of the few crypto assets with a true measurable intrinsic value behind it, along with the prospect for growth. In addition to being a viable store of value, investment, and spendable currency, it looks to be a true ‘stable coin’ in the very volatile crypto space. During the 7 days ending February 6th, as the entire crypto space decreased in value by around 45 percent,  XAUR tokens were up slightly. This is very impressive, but unsurprising as in times of stress investors flock to assets with true intrinsic value and relative stability. Currently, the XAUR tokens trade for a little more than 3x the book value of the gold that is backing each one. This premium is the market’s estimate of future growth of the gold ratio per token.  

In a sea of tokens and projects that hold little investment value within the crypto universe, these two physical gold-backed assets could offer a rare opportunity in a very popular and exciting space. That being said, these are still early stage and unique investments that have a significant amount of risk ,and any investor should do their own research before making a potential purchase of either of these assets.

Eric Mancini, CFP, CAIA is the director of investment research and a wealth advisor with Traphagen Financial Group ( TFG is an independent RIA located in northern New Jersey. The author is LONG both DGD and XAUR.

Posted-In: Cryptocurrency Markets


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