A new research note released by the Bank of Singapore (BOS) suggests that cryptocurrencies have the potential to replace gold as a store of value. However, the report says that these digital currencies like Bitcoin are unlikely to be able to replace fiat currencies, even as their adoption increases.
“Inefficient exchange medium”
According to the research note, it is the volatility of cryptocurrencies that makes them “an inefficient medium of exchange”. Still, as a local report explains, cryptocurrencies have a better chance of being able to overcome “important obstacles such as trust, volatility, regulatory acceptance and reputation risks”. When these obstacles are overcome, then these "digital currencies can also be used in investor portfolios as a potential safe haven for assets and diversification".
Meanwhile, the same report quotes Mansoor Mohi-uddin, the chief economist at BOS, who explains that investors also "need reliable institutions to be able to hold digital currencies safely". One of Bitcoin's innovations, however, is precisely the possibility for anyone to take custody of their assets. No matter how much value you are holding, the user will have no significant costs in doing so.
But in addition, the economist says that "liquidity needs to improve significantly to reduce volatility to manageable levels". Although the value of bitcoin has gone up more than 300% in the past year, the digital asset has experienced huge price fluctuations throughout the year. At one point, the asset fell by more than 40% on a day that became known as Black Thursday.
Using this price drop as an example, Mohi-uddin concludes that bitcoin is in fact “correlated with stocks and other risky assets, rather than being traded as a countercyclical safe haven”.
According to the economist's assessment, this means that the crypto “is likely to be dumped by investors during a market meltdown, as occurred at the beginning of the pandemic in March 2020.”
Institutional investors and liquidity
In the meantime, BOS suggests that increasing participation in the cryptocurrency markets by larger investors may be a way to address the liquidity challenge. The bank says:
“Increased participation by institutional investors, such as asset managers with longer term horizons than retail buyers or hedge funds, can help increase liquidity, decrease volatility and cause price action driven by fundamentals rather than speculation. ”
Regarding the potential function of digital currencies as alternatives to fiat money, the BOS research note considers its reputation risks to be an impediment. In addition, Mohi-uddin argues that governments have shown their reluctance to adopt a technology that "could potentially replace national currencies". In addition, he says governments may not tolerate technologies that restrict “policymakers' ability to print money during economic crises”.
Do you agree with the Bank of Singapore that cryptocurrencies will not replace fiat currencies? Leave your opinion in the comments section below.
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