SINGAPORE: Privately-issued digital currencies are very unlikely to replace government-issued fiat currencies as a medium of exchange but could partially displace haven assets like gold, new research shows.
Cryptocurrencies could replace gold as an electronic store of value once key hurdles such as trust, volatility, regulatory acceptance and reputational risks are overcome, according to a research note from the Bank of Singapore, report agencies.Once these disadvantages have been addressed, digital currencies can also be used in investor portfolios as a potential safe-haven asset and for asset diversification, it said.
“First, investors need trustworthy institutions to be able to hold digital currencies securely. Second, liquidity needs to improve significantly to reduce volatility to manageable levels,” Mansoor Mohi-uddin, chief economist at Bank of Singapore, said.
Concentrated holdings and thin market volumes are driving volatility in cryptocurrencies, which is one of the greatest barriers to their adoption in real world transactions, Swiss private bank Lombard Odier said in a recent research note.
“Bitcoin is highly volatile as its rally over the past year from $4,000 to more than $40,000 and then back towards $30,000 shows,” Bank of Singapore’s Mr Mohi-uddin said. “Bitcoin is also correlated with stocks and other risk assets rather than trading as a counter-cyclical safe-haven. In a financial crisis, cryptocurrencies are more likely to be dumped by investors during a market meltdown, as occurred at the start of the pandemic in March 2020.”
Yet increased participation by institutional investors such as asset managers with longer-term time horizons than retail buyers or hedge funds could help to increase liquidity, lower volatility and cause price action to be driven more by fundamentals than speculation, Bank of Singapore said.