Gone are the days where people treated crypto as a scam. The pandemic brought it to the limelight, and so far, it is increasingly being used as a store of value.
According to the Bank of Singapore, cryptocurrency gains outperformed both the gold and Dow Jones stock market ten times more in 2020.
According to the bank’s chief economist Mansoor Mohi-uddin, BTC (Bitcoin) supply shows that investors are gearing towards diversifying their portfolios. That does not mean that there are not regulatory and reputational challenges, though. Some of the challenges include the need for reputable institutions for holding the cryptocurrencies. There is also a need for increased liquidity to lower the volatility levels. With more institutional investors on board, there will be high liquidity and lower volatility. This will make the price not to be driven by speculation but by fundamentals.
BTC (Bitcoin) has been very volatile, especially in the recent bullish rally that moved from $4000 to more than $40,000 and then to $30,000. Even though BTC (Bitcoin) is decentralized, it is, in a way correlated with stocks and other risk assets.
When the market faces a financial crisis, there are high chances that investors will run to cryptocurrencies than when there is a market meltdown. They dump their investments, as was experienced in March 2020.
The Covid-19 pandemic was a shining season for BTC (bitcoin) as it increased in value by over 300%. This made it ten times better than the gold and Dow Jones stock market. This caused many to use it as digital gold.
The main class that pushed the value of BTC (Bitcoin) up are institutional investors. Hence, they used it as a store of value to shield them from the risky uncertain market conditions.
From a study done by SimpleMoneyLife, there are 67% of millennials would choose BTC (Bitcoin) to gold. The figures will rise even higher when more of them understand cryptocurrency more. The younger generation loves the convenience that comes with technology. BTC (Bitcoin) can be stored in a digital wallet, unlike gold, that has to be stored in a secure physical location and cannot be accessed at any time.
On the contrary, digital assets face a high risk of being stolen by fraudsters. Money launderers and cybercriminals have preferred them since they are anonymous. There is still the aspect of reputational risks since it is the first choice for criminals.
Even though there has been a high market buzz on BTC (Bitcoin), it still has many loopholes. Also, it has a long way of fulfilling its purpose of peer-to-peer electronic cash as it was its intended purpose.
Initially, many dismissed the idea of cryptocurrencies replacing fiat currencies due to the high volatility. Bank of Singapore was among them as it did not believe BTC (Bitcoin) can replace traditional fiat currencies like the US dollar.
Governments are not an exception either, as they fear any technology that could displace their traditional system and national currencies. According to Mansoor, digital currencies will limit policymakers when they need to print money when faced with an economic crisis.
BTC (Bitcoin) has been chosen as a storage of value since it is not subject to inflationary measures.
The dark side
As mentioned earlier, cryptos come with many reputational risks. Another major problem is the launch of many new cryptocurrencies can make the older ones lose value, unlike gold, where its supply is finite.
Since cryptocurrencies are highly volatile, they are not an efficient unit of exchange. They have a limited supply, and hence it can be hard for them to facilitate any growing economic activity. Governments are also not willing to give up their national currencies for cryptocurrencies.