Why Gold Matters
Gold is making headlines in 2025, hitting new all-time highs amid a surge in safe-haven demand. The price of gold surpassed $3,000 per ounce for the first time ever, reflecting a comeback for the yellow metal. Investors are once again flocking to gold due to renewed worries about fiat currency debasement and global instability.
With Bitcoin often called “digital gold,” some have questioned whether physical gold is still relevant. The recent data speaks for itself: gold remains crucial for diversification and stability. The 1-year retrun of gold as at March 2025 is 36%, outpacing major stock indices as well as Bitcoin.
Lower Volatility Compared to Bitcoin
Gold’s price fluctuations are much milder compared to Bitcoin’s wild swings. For example, as of 2024, Bitcoin’s volatility was roughly 47%, versus only 12% for gold. This means Bitcoin can swing almost four times more sharply than gold on average – a huge difference for risk-conscious investors. We saw this in action in early 2025: over a span of weeks when tech stocks (Nasdaq) fell nearly 15%, gold held steady (up ~1%) while Bitcoin dropped about 20%, mirroring the stock sell-off. Gold’s lower volatility makes it a valuable asset for preserving capital during market turmoil, whereas Bitcoin often behaves 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
Gold and Bitcoin have diverged in recent market cycles. In the past year, gold steadily climbed to new highs, boosted by inflation fears and war tensions. Bitcoin, on the other hand, traded in wide ranges and was heavily influenced by investor risk appetite. Notably, gold’s correlation with traditional assets is low or even negative, which is ideal for diversification. In fact, gold has shown a negative correlation with Bitcoin as well, which strengthens portfolio diversification when holding both.
Tokenized Gold in 2025
One of the most exciting developments is how gold itself has joined the blockchain revolution. Tokenized gold – digital tokens 100% backed by physical gold – has seen remarkable growth. The market capitalization of gold-backed crypto tokens hit a record $1.4 billion in March 2025. Two tokens dominate this space: PAX Gold (PAXG) and Tether Gold (XAUt). These allow investors to own gold in digital form, combining the stability of gold with the flexibility of crypto.
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 New York-regulated financial institution. Each PAXG token represents one fine troy ounce of gold stored in LBMA-accredited vaults in London. Importantly, Paxos operates under strict oversight – the token is fully backed 1:1 by physical gold and undergoes monthly third-party audits to verify the reserves. This regulatory compliance (Paxos is chartered by the NYDFS) gives PAXG holders confidence that the token truly is fully backed.
In 2025, PAXG’s popularity grew steadily. Its market capitalization stands around $680 million, roughly half of the tokenized gold sector. Daily trading volumes for PAXG often reach tens of millions of dollars. PAXG benefited from regulatory trust – even after some stablecoin scrutiny in the US, Paxos Gold continued to operate smoothly. We also saw new use cases: for example, in late 2024 the derivatives exchange Deribit launched PAXG futures and options, indicating rising institutional interest 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 affiliated with Tether. Each XAUt represents one troy ounce of gold stored in Swiss vaults that meet London Good Delivery standards. XAUt has gained traction and in 2025 with about $770 million market cap.
However, XAUt has a different regulatory profile. In 2023, Tether moved its gold token operations under the oversight of El Salvador – TG Commodities is licensed as a stablecoin issuer in El Salvador, which provides a regulatory framework. Tether Gold publishes periodic reports on its gold reserves and claims full backing, but unlike Paxos, it has not yet undergone a full independent audit of those reserves. This has led to some transparency concerns. Tether’s leadership has stated that a comprehensive audit (by a Big Four firm) is a top priority in light of new stablecoin rules, so the hope is that XAUt’s backing will be verified to the same standard as PAXG in the near future.
Source: https://gold.tether.to/
Yield Opportunities in DeFi
Beyond simple buying and holding, tokenized gold has opened up new use cases in decentralized finance (DeFi). In 2025, crypto investors are deploying gold-backed tokens in various yield-generating strategies, effectively putting their gold to work. This is a notable development – historically gold just sat in a vault earning nothing, but now gold can earn yield without leaving the vault, thanks to DeFi protocols.
Liquidity Pools & AMMs
For example, Uniswap’s PAXG/USDC pool allows traders to swap between tokenized gold and the U.S. dollar. Liquidity providers in this pool earn trading fees.
This setup lets LPs earn passive income while maintaining exposure to gold, making it an appealing option—especially during periods of heightened gold interest and trading activity.
Source: https://defillama.com/yields/pool/459e731e-60a0-45fa-8b49-092468ab14f5
Another option is the PAXG/WETH pool, which enables swaps between gold and Ethereum. This pool has a higher liquidity. However, it also tends to carry higher impermanent loss, because PAXG (which tracks gold) is relatively stable, while WETH (which tracks Ethereum) is highly volatile. When ETH’s price moves sharply up or down, the relative value between the two assets diverges—causing imbalances that lead to greater IL for liquidity providers.
Both pools offer yield opportunities, but the risk-reward profile differs depending on the volatility of the paired asset.
Source: https://defillama.com/yields/pool/40ac1aaf-26f1-4a04-b908-539f37672ef2
Impermanent loss
Impermanent loss (IL) is a key concept in decentralized finance (DeFi), particularly for liquidity providers (LPs) on automated market makers (AMMs) like Uniswap. It occurs when the value of tokens in a liquidity pool diverges from the value those tokens would have had if simply held outside the pool, due to price changes between the paired assets. IL is "impermanent" because it only becomes a realized loss if the LP withdraws their funds during a period of price divergence; if prices revert to their original ratio, the loss may diminish or disappear. However, the risk and magnitude of IL depend heavily on the volatility and correlation of the paired assets.
The PAXG/USDC pool pairs PAX Gold (PAXG), a stablecoin pegged to the price of gold, with USD Coin (USDC), a stablecoin pegged to the U.S. dollar. Both assets are designed to maintain stable values relative to their respective pegs—gold and USD. Because gold prices tend to fluctuate modestly compared to cryptocurrencies and USDC remains tightly pegged to $1, the price ratio between PAXG and USDC is relatively stable over time. This stability minimizes the divergence in their relative values within the pool, resulting in a lower risk of impermanent loss.
In contrast, the PAXG/WETH pool pairs PAXG with Wrapped Ether (WETH), a tokenized version of Ethereum’s native cryptocurrency, ETH. While PAXG tracks gold and exhibits moderate price movement, WETH is tied to ETH, which is notoriously volatile in the crypto market. Ethereum’s price can swing dramatically—sometimes 20-50% or more in a short period—driven by market sentiment, network developments, or macroeconomic factors. When WETH’s price rises or falls significantly relative to PAXG, the pool’s constant product formula forces a rebalancing of the assets, reducing the LP’s exposure to the outperforming asset (e.g., PAXG during a rally) and increasing exposure to the underperforming one. This rebalancing amplifies IL, as the LP ends up with fewer high-value tokens than they would have by simply holding.
Impermanent Loss estimates from Yield Samurai
Source:https://yieldsamurai.com/
