The outperformance of the cryptocurrency market is taking by surprise many traditional investors. A generational change is pending and with it, the whole notion of value seems to be shifting. Technology is at the center of the and the blockchain, used in crypto, seems to be one of the areas where money flows this year. Faced with that development, we would like to talk about whether crypto is truly a store hold of value and whether that can last in the long run.
Diminishing purchasing power of fiat currencies
We’ve already seen whether a Joe Biden Presidency can be bullish for Bitcoin and other cryptocurrencies, but what’s important to highlight is that the outperformance of crypto can be attributed to the diminishing purchasing power of fiat money. The US dollar continues to be the global reserve currency and it is currently yielding a 0% interest rate.
Considering inflation is above 0%, cash is providing a negative yield, which is why investors are selling cash for hard assets. Central banks can print as much as they want and government can increase deficits to alter economic activity, but in the case of crypto, most of the large-cap tokens have a fixed supply and thus can’t be artificially inflated as fiat currencies.
Elevated risk appetite
On top of increasing the money supply to artificially inflate nominal GDP, central banks and governments had managed to meaningfully influence the investors’ risk appetite. As a result, assets that were before deemed as risky now are posting impressive gains. Exuberance is back on and we don’t know how much it could last. What’s clear, though, is that stimulus will eventually be removed, and a repricing of asset valuations will occur.
Adoption and competition from CBDCs
As long as adoption hopes will be intact, cryptocurrencies can benefit from consistent inflows. However, competition from CBDCs (central bank digital currencies) are emerging and could replace traditional cryptos. Investors are now looking at these as payment methods, or in the short run, as buyable assets that can produce returns.
To answer the title question, cryptocurrencies are now a store hold of value and that could last until fiat currencies will start to rise again. Money is loaned into existence and the massive stimulus is creating a huge deflationary pressure down the road. How much crypto will be valuable to people and whether valuations can remain at elevated levels would depend on a broad range of factors, which makes investing even difficult from now on.