Most people still haven't heard of the term blockchain, but chances are you will soon. A blockchain is a tamper-proof, distributed electronic ledger that exists across a decentralized network. It is exactly this kind of ledger than enables cryptocurrencies like Bitcoin to operate.
Blockchain technology can do much more than verify Bitcoin transactions, and using blockchains to enable people to buy, sell and control amounts of gold in new and novel ways is gaining popularity.
Blockchain-Based Claims on Physical Assets
Bitcoins or other cryptocurrency units are naturally fungible: if you have 5 Bitcoins, it doesn't matter which one is which or which came from where. Just like money, fungible means that every unit is essentially the same or can be made equivalent (say making change of $5 with five singles). If you want to use the blockchain to transfer and validate ownership of something other than Bitcoin, you need to remove this fungibility. One way to do this is to create so-called "colored coins" via protocols such as Open Assets or Counterparty. These protocols essentially take small fractions of Bitcoins (on the order of one ten-thousandth of one Bitcoin) and tag them as to represent something specific. In other words, instead of representing 0.0001 BTC, this sum becomes a token that can represent anything at all, including ownership of physical gold.
Serica is a company that issues such colored coins representing actual physical gold bullion, which it owns and stores in vaults in the state of Delaware and in Singapore. When you purchase a "certificate of ownership" from Serica, it essentially gives you the right to that amount of gold in Serica stores. The price of these certificates depends on the spot price of gold in the market, so one could simply buy and sell these claims on the physical gold to speculate on its price.
Thailand-based MidasRezerv also uses colored coins, but each of its tokens represents a standardized unit of one gram of gold, which it has stored in vaults located in Hong Kong, Dubai and Amsterdam. (For more, see: Basics For Buying And Investing In Bitcoin.)
Smart Contracts and Gold Futures
One powerful feature of blockchain technology is that it enables "smart contracts." These are self-executing contracts that are automatically carried out when certain criteria are met. For example if two people make a bet that an event will occur and wager 5 BTC, the smart contract will reward the winner five Bitcoins if that event occurs while debiting the losing side. These smart contracts can be configured to function much like futures contracts.
One such smart contract that is pegged to the dollar price of an ounce of gold is BitShares, which is referred to as a "smart currency" or BitAsset. Just like futures and other derivatives contracts, there is no physical gold backing the price of BitShares. Instead, the price is based on a contract dependent on the value of gold at any point in time. What underlies these contracts is its own digital currency, or BTS, which is similar in many ways to any other cryptocurrency alternative to Bitcoin (sometimes referred to as 'altcoins'). What makes BitAssets unique is that it specifies that no matter what, it will exchange the equivalent of one ounce of gold in BTS for one smart contract representing one ounce of gold. Currently the price of one BTS is approximately $0.004, so the redemption of one gold BitAsset contract when gold is trading at $1,155 per ounce would yield just about 290,000 BTS which could then be exchanged for dollars on a cryptocurrency exchange. (See also, Can Bitcoin Be Hacked?)
Bitcoin-Gold Marketplaces
Vaultero allows individuals to purchase gold bullion in exchange for Bitcoin, without the need to exchange it into national currency. The physical gold is held in escrow by the company in Swiss vaults and can be exchanged back into Bitcoin at any time and for any amount. Vaultoro even offers actual delivery of your gold upon request if you pay for shipping, handling and insurance.
BitGold is another service that allows you to buy gold using Bitcoin and keep it in reserve. Their unique feature is that its customers are issued a debit card which can be used around the world at any merchant who accepts credit cards and draws down the gold value that they have laid claim to in order to make purchases.
Online cryptocurrency to fiat currency exchange Bitserve recently announced it would also add gold to its assets you can buy for Bitcoin in addition to national currencies such as dollars, euros or Chinese yuan.
If you simply want to exchange some Bitcoin and get some real gold you can hold in your hand immediately, traditional precious metal dealers Amagi Metals and Veldt Gold are among the few that do so. (See also, The Easy Way To Measure Bitcoin's Fair Market Value.)
The Bottom Line
The blockchain is a powerful data structure tht promises to revolutionize the way people conduct business around the world and disrupt how financial transactions take place. One small example of this claim is the ability of the blockchain to allow people to buy, sell and trade gold. In many cases, these people did not have access to gold exchanges via other venues. Whether it is via colored coins, smart contracts or the exchange of cryptocurrency for gold, it has never been easier to trade gold in such a secure and frictionless manner.
