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 notice states that such digital currencies are unlikely to be able to replace fiat currencies, even as their appeal increases.
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 Cryptocurrencies have a better chance if they can overcome “important hurdles such as trust, volatility, official acceptance and reputational risks”. Once these hurdles are overcome, such “digital currencies can also be used in investor portfolios as potential safe havens and for asset diversification”.
In the same media report, Mansoor Mohi-uddin, chief economist at BOS, is quoted as saying that investors “also need trustworthy institutions in order to be able to keep digital currencies safe”. In addition, the economist says: “The liquidity must be significantly improved in order to reduce the volatility to a manageable level.”
Although the value of Bitcoin has increased more than 300% in the past year, the digital asset has been subject to sharp price fluctuations across the board. At one point, the crypto asset crashed more than 30% on a day known as Black Thursday. Taking this price drop as an example, Mohi-uddin comes to the conclusion that the crypto asset is actually “correlated with stocks and other risk assets, rather than acting as a countercyclical safe haven”.
According to the economist, this means that the crypto asset is “likely to be dumped by investors during a market crash such as the one that occurred at the start of the pandemic in March 2020”.
Institutional Investors and Liquidity
In the meantime, the BOS suggests that increased participation by larger investors in the cryptocurrency markets could be one way of solving the liquidity problem. The BOS says:
Increased involvement of institutional investors such as longer-term asset managers as private buyers or hedge funds could help increase liquidity, reduce volatility and guide pricing action on fundamentals rather than speculation.
Regarding the potential function of digital currencies as an alternative to fiat money, the BOS research report sees their reputational risks as an obstacle. Furthermore, Mohi-uddin argues that governments have shown their reluctance to use technology that “could potentially displace national currencies”. In addition, governments may not tolerate technologies that “limit the ability of policymakers to print money during economic crises”.
Do you agree that cryptocurrencies will not replace fiat currencies? Let us know what you think in the comment section.
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