Author: 0xEdwardyw
Why gold still matters
Gold is making headlines again in 2025, hitting new all-time highs driven by a surge in safe-haven demand. Gold prices have surpassed $3,000 an ounce for the first time, marking a strong comeback for the “king of precious metals.” Investors are flocking back to gold as concerns about fiat currency debasement and global instability resurface.
Bitcoin is often referred to as "digital gold," and many people have begun to question whether physical gold still makes sense. However, the latest data has it all: gold remains essential for asset diversification and stability. As of March 2025, gold's annual return rate reached 36%, outperforming major stock indices and Bitcoin.
Lower volatility than Bitcoin
Compared to Bitcoin's wild price swings, gold's price movements are much more moderate. For example, as of 2024, Bitcoin's annual volatility is about 47%, while gold's is only 12%. This means that Bitcoin's price volatility can be nearly four times that of gold on average. For investors who focus on risk control, this difference is crucial.
We have already seen this in early 2025: while tech stocks (NASDAQ) fell nearly 15% in a few weeks, gold was essentially flat (up about 1%), while Bitcoin fell about 20%, moving almost in sync with the stock market. Gold's low volatility makes it a valuable asset for capital preservation during market turmoil, while Bitcoin is more like a high-beta risk asset.
Source: https://www.ishares.com/us/insights/bitcoin-volatility-trends#:~:text=,deviation%20of%20annualized%20daily%20returns
Low correlation with Bitcoin
In the recent market cycle, the trend of gold and Bitcoin has diverged. In the past year, gold has steadily risen to new highs driven by inflation concerns and war tensions, while Bitcoin has fluctuated in a wide range, and its trend is more affected by investors' risk appetite. It is worth noting that gold has a low correlation with traditional assets, or even negative, which is ideal for diversification in asset allocation. In fact, gold and Bitcoin also show a negative correlation, which means that holding both at the same time can further enhance the diversification of the portfolio.
Tokenized Gold in 2025
One of the most exciting developments is that gold itself has joined the blockchain revolution. So-called "tokenized gold," digital tokens that are 100% backed by physical gold, are experiencing rapid growth. In March 2025, the market capitalization of gold-backed crypto tokens hit an all-time high of $1.4 billion. This track is dominated by two tokens: PAX Gold (PAXG) and Tether Gold (XAUt). These tokens allow investors to hold gold in digital form, combining the stability of gold with the flexibility of crypto assets.
Source: https://www.coindesk.com/markets/2025/03/27/tokenized-gold-hits-new-record-market-cap-as-trading-volumes-soar-in-march
PAXG (Paxos Gold)
PAX Gold (PAXG) is issued by Paxos Trust Company, a regulated financial institution headquartered in New York. Each PAXG token represents one ounce of refined gold stored in a London Bullion Market Association (LBMA) certified vault. Importantly, Paxos operates under strict regulation - the token is fully backed 1:1 by physical gold and is subject to monthly audits by a third party to verify its reserves. Paxos is authorized by the New York State Department of Financial Services (NYDFS), so it is highly compliant and provides full confidence for holders.
PAXG's popularity has steadily increased in 2025. Its current market capitalization is about $680 million, accounting for about half of the tokenized gold market. PAXG's daily trading volume often reaches tens of millions of dollars. It benefits from regulatory trust, and Paxos Gold remains stable even after the United States' scrutiny on stablecoins has intensified.
New PAXG trading products are also emerging: for example, at the end of 2024, the derivatives exchange Deribit launched futures and options contracts for PAXG, marking the rising interest of institutional investors in tokenized gold as a trading asset.
XAUt (Tether Gold)
Tether Gold (XAUt) is another major gold-backed token, issued by TG Commodities, a company associated with Tether. Each XAUt represents one ounce of gold stored in Swiss vaults that meet the London Good Delivery standard. As of 2025, the market value of XAUt is approximately $770 million.
However, XAUt's regulatory framework is different from PAXG. In 2023, Tether moved its gold token business to El Salvador under supervision, and TG Commodities obtained a stablecoin issuance license in El Salvador, so it operates within the country's regulatory framework. Tether Gold regularly publishes gold reserve reports and claims that its tokens are fully backed by physical gold, but unlike Paxos, it has not yet undergone a complete independent audit of its reserves. This has also raised concerns about its transparency in some markets.
Tether’s management has stated that, given the new regulatory rules in the stablecoin space, a comprehensive audit by one of the Big Four accounting firms has become a top priority. The market also generally hopes that XAUt’s gold reserves will achieve the same level of audit standards and transparency as PAXG in the near future.
Yield Opportunities in DeFi
In addition to simply buying and holding, tokenized gold has opened up new use cases in decentralized finance (DeFi). Crypto investors can deploy gold-backed tokens into a variety of yield-generating strategies, making gold an asset that can generate passive income. Historically, gold usually just sat quietly in the vault, generating almost no income; now, gold can also generate returns with DeFi protocols without moving the physical gold.
Liquidity Pools and Automated Market Makers (AMMs)
For example, the PAXG/USDC pool on Uniswap allows users to trade between tokenized gold and the U.S. dollar. Liquidity providers (LPs) in this pool can earn profits by earning transaction fees.
This mechanism allows LPs to earn passive income while maintaining gold exposure, which is particularly attractive during periods of high gold fever and active trading.
Source: https://defillama.com/yields/pool/459e731e-60a0-45fa-8b49-092468ab14f5
Another option is the PAXG/WETH liquidity pool, which supports the exchange between gold and Ethereum. This pool is usually more liquid, but it is also more prone to "impermanent loss" because PAXG (tracking gold prices) is relatively stable, while WETH (tracking ETH) is extremely volatile. When the price of ETH fluctuates violently, the relative value of the two assets will quickly diverge, resulting in a greater risk of impermanent loss.
Both pools offer income opportunities, but their risk-reward characteristics vary depending on the volatility of the paired assets.
Source: https://defillama.com/yields/pool/40ac1aaf-26f1-4a04-b908-539f37672ef2
Impermanent Loss
Impermanent loss (IL) is a core concept in DeFi, especially for users who provide liquidity in automated market makers (AMMs) such as Uniswap. When the prices of two tokens in the liquidity pool change compared to when they are held separately, the value of the assets borne by the LP may decrease. This loss is called "impermanent loss". It is called "impermanent" because if the price returns to the original ratio, the loss may decrease or disappear; but if liquidity is extracted when the price deviates, this part of the loss will become "permanent loss".
The size of IL mainly depends on two factors: volatility and correlation of paired assets.
In the PAXG/USDC pool, on one side is the stablecoin PAX Gold (PAXG) anchored to the gold price, and on the other side is the stablecoin USDC anchored to the US dollar. Since the volatility of gold prices is much lower than that of crypto assets, and USDC always maintains $1, the price ratio between this pair of assets is relatively stable, which significantly reduces the risk of impermanent loss.
In contrast, PAXG in the PAXG/WETH pool is paired with WETH. PAXG is less volatile, while the ETH market is volatile, sometimes rising or falling 20–50% in a short period of time. This drastic fluctuation triggers the AMM's "constant product" algorithm, causing the assets in the pool to rebalance, reducing the proportion of assets that perform well (such as PAXG when it rises) and increasing the proportion of assets that perform poorly (such as ETH). In the end, the high-value assets left by LPs will be far less than the result of simply holding them, resulting in larger-scale impermanent losses.
Yield Samurai’s Impermanent Loss Estimation Chart
Source: Samurai
