A new research note from the Bank of Singapore (BOS) suggests that cryptocurrencies are more likely to replace gold as a store of value. However, the note says that such digital currencies are unlikely to replace fiat currencies, even as their appeal grows.
Inefficient exchange unit
According to the research note, it is the volatility of cryptocurrencies that makes them “an inefficient unit of exchange.” This inefficiency in turn makes cryptocurrencies an unsuitable medium of exchange. Still as a local point of sale report explains that cryptocurrencies have a better chance if they can “overcome major hurdles such as trust, volatility, regulatory adoption and reputation risks”. When these hurdles are overcome, such “digital currencies can also be used in investor portfolios as potential safe assets and for asset allocation”.
Meanwhile, the same media report quotes Mansoor Mohi-uddin, the chief economist at BOS, as explaining that investors also “need trustworthy institutions to keep digital currencies safe.” In addition, the economist says that “liquidity needs to improve significantly to bring volatility back to manageable levels.”
While bitcoin’s value has risen by more than 300% in the past year, the digital asset has experienced major price swings everywhere. At one point, the crypto asset crashed by more than 30% in a day that has come to be known as the Black Thursday. Using this price crash as an example, Mohi-uddin concludes that the crypto asset is in fact “correlated with stocks and other risky assets rather than acting as an anti-cyclical safe haven”.
According to the economist’s assessment, this means that the cryptocurrency is “likely to be dumped by investors during a market collapse, as happened at the start of the pandemic in March 2020.”
Institutional Investors and Liquidity
Meanwhile, the BOS suggests that increased participation in the cryptocurrency markets by larger investors could be one way to solve the liquidity challenge. The BOS says:
Greater participation from institutional investors, such as asset managers with a longer time horizon than retail buyers or hedge funds, could help increase liquidity, lower volatility and ensure that price action is driven more by fundamentals than speculation.
Regarding the possible function of digital currencies as an alternative to fiat money, the BOS research note finds their reputation risks an obstacle. In addition, Mohi-uddin argues that governments have shown their reluctance to embrace a technology that “may displace the national currency”. In addition, he says governments may not tolerate technologies that limit “policymakers’ ability to print money during economic crises.”
Do you agree that cryptocurrencies will not replace fiat currencies? Tell us what you think in the comments section.
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