Bitcoin and other cryptocurrencies could replace traditional safe-haven assets such as gold, according to the Bank of Singapore.
Mansoor Mohi-uddin, the bank, wrote in a research note that Bitcoin's finite supply demonstrates that investors are increasingly turning to it to bolster their portfolios, although there are still many challenges surrounding the digital currency.
For example, investors need reliable institutions that can keep digital currencies safe. In addition, liquidity needs to be significantly improved to reduce volatility to manageable levels, according to Mohi-uddin.
The economist added: “Bitcoin is extremely volatile as its rally last year moved from $4,000 to over $40,000 and then returned to $30,000. Bitcoin is also correlated with stocks and other risk assets. In an economic crisis, cryptocurrencies are more likely to be rejected by investors during a market, as happened at the beginning of the COVID-19 in March 2020.” Bitcoin’s decline during the pandemic appears to have been temporary, as the cryptocurrency recovered and emerged as one of the best performing assets of 2020.
The nearly 300% price surge saw Bitcoin outperform the combined gains of gold and the Industrial Average by a factor of 10. This seems to confirm analysts' view that the cryptocurrency is increasingly seen as a form of "digital gold" among investors.
2020 saw a huge surge in interest in Bitcoin from both institutional and casual investors attracted by the ease of buying and storing cryptocurrencies compared to precious metals. This was demonstrated by a recent study by SimpleMoneyLife, which found that 67% of millennials would rather own Bitcoin than gold.
Despite investor interest, Bitcoin is still a long way from fulfilling potential as a Peer-to-Peer electronic system , for which it was originally created.
This stance by the Bank of Singapore, first reported by “The National News,” dismissed Bitcoin as a viable option to replace traditional currencies like the US, due to its volatility and resistance from governments to challenges to their monetary sovereignty.
In particular, Mohi-uddin pointed out that governments are very wary of any technology that could potentially displace national currencies, as doing so would reduce the ability of policymakers to print money during economic crises.
Conversely, the fact that Bitcoin is not subject to inflationary measures, such as quantitative easing, makes it an extremely suitable candidate to function as a store of value.
