“I’m not sure it answers a need that people have”

Just over three years ago, the Perth Mint announced that it was creating a new cryptocurrency, which came to be known as the Perth Mint Gold Token.  At the time, Today Tonight did a story and asked me to make some comments.  Frankly, at the time I couldn’t see the market demand for this.  It seemed to me that they had succumbed to the then-current hype around crypto. Creating a purported type of stablecoin that was backed by physical gold was simply creating a solution to a problem that didn’t exist.

Since then I have done a lot more work and study in blockchain technology. Frankly, I had totally forgotten about the PMGT (as it turns out, spoiler alert,  so had most everybody else).  Then I got one of those ‘this happened three years ago’ reminders regarding the story, so I thought I would see what had happened.  

A timely intervention it seems.  Several weeks later the Perth Mint ran into some other problems and subsequently, they announced that the PMGT is now being discontinued.

Regardless of the merits of the project or the manner in which it was implemented, the PMGT turns out to be a microcosm of the lessons that investors need to consider when looking at crypto. 

Investing in cryptocurrency can be a daunting task, especially given the volatility and complexity of this emerging asset class. To make informed investment decisions, investors must assess the merits of any particular cryptocurrency and understand the reasons behind its creation.

Remind me: why Blockchain and Cryptocurrencies?

Check out my earlier posts here and here for more detail on this important topic for sophisticated investors.  In summary, Blockchain technology is designed to create a decentralised, immutable, and scalable system for storing data records.  As such, it has the potential to both create and transform industries in that it reduces the costs of compliance (amongst other things). 

To transact on a blockchain, you need to use cryptocurrencies that are native to that particular blockchain. Ethereum blockchain was innovative in that it developed a standard that allowed different cryptocurrencies to use the same blockchain. 

However, valuing cryptocurrencies can be challenging, resulting in high volatility that makes them difficult to use as a store of value. To address this issue, stablecoins were developed – cryptocurrencies that are backed by an asset such as fiat currency or gold.

So why Perth Mint?

Over three years ago, the Perth Mint announced that they were developing the Perth Mint Gold Token cryptocurrency, designed to track the price of gold. Each PMGT was backed by one ounce of gold. At the time, they promoted it as an innovative solution to the challenge of valuing cryptocurrencies. 

Personally, I felt it was an over-engineered solution to a need that didn’t exist.  There are plenty of other ways to buy gold if that is what you want to do. Physical gold is easy to buy,  there are gold ETFs (also backed by physical gold), and professional traders simply transact based on the price of gold in a derivative fashion. Alternatively, if you are after a stablecoin, why not use a US dollar stablecoin rather than a gold stablecoin, given that the gold price internationally is a derivative of the value of the US dollar?

Unfortunately for the Mint, it seems I had a point.  Three years later, the PMGT is about to be discontinued.  The stats for this aren’t flattering.  Despite the Mint holding billions of dollars worth of gold, the market cap was only ever a couple of million. There were only about 1125 tokens ever issued. This lack of adoption is evident in the low number of addresses with PMGT.  The top wallet holds 67% of the supply, and the Top 10 wallets account for nearly 92% of the tokens that were minted. 

Perhaps more damningly, the PMGT failed to be true to its label.  Despite its 1 to 1 backing with physical gold, its price varied materially from the actual gold price. Chart 1 below shows the daily prices of PMGT and Gold for the past year, revealing material variance between the two. 

Chart 2 highlights the variation as a percentage of the daily gold price.  For a clever trader, there could be a potential opportunity for arbitrage here, though I suspect the limited liquidity in PMGT may have proved difficult.

Sources: 

PMGT prices – https://finance.yahoo.com/quote/PMGT

Gold Prices: www.gold.org

Note: there may be some slippage on daily pricing due to time differences in captured prices however, any effect is consistent across the period illustrated

What is surprising is how much the price of PMGT varied from the actuarial physical gold price – in both directions.  At times it moved over 10% from the asset it was supposed to track.  Although the overall PMGT price trend roughly followed the physical gold price, it significantly lagged behind physical gold for the last 6 months.

Why?  Frankly, I have no idea but I suspect the cause is structural and related to the tight ownership spread, small market cap and low liquidity.  There simply wasn’t sufficient volume for price discovery to operate efficiently.

So what can we learn?

Investors can learn from the PMGT example that it is essential to understand the business model behind a particular cryptocurrency before investing. It may be innovative, new, and exciting technology, but the same rules that apply to ‘bricks and mortar’ businesses need to be used when considering investing in cryptocurrency. 

Part of me admires the quest for innovation that the Mint demonstrated with this product, but equally, I wonder how much market research they did before agreeing to proceed.  This whole exercise would not have been cheap to run and will have cost someone a lot of money.

To me, there is no doubt that Blockchain technology will play an increasingly important role in the future of finance. Cryptocurrencies Investors should consider the use cases, market demand, and systemic risks of each cryptocurrency. In all of this, it pays to invest in professional advice, not only for the specific investment but also in seeing how it fits into your overall investment objectives.

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