We have to face a period of great uncertainty and since cryptocurrencies had proven to be volatile over the years, the overall sentiment around is very bearish. However, if we analyze the performance from a historical point of view, we can easily notice that valuations had cyclically moved on the upside, even though critics had predicted cryptocurrencies are doomed to failure. In order to counteract the negative feedback currently floating in the markets, we would like to talk about three solid reasons why cryptocurrencies could rise in the long run.
#1 Fiat devaluation
The economic performance is expected to be very poor in 2020 and the impact of the COVID-19 pandemic will be felt even in 2021. As a result, governments around the world had already adopted extraordinary fiscal and monetary measures, in order to flood the markets with fiat liquidity. If the newly printed money won’t prop up economic activity, the very likely scenario will be fiat devaluations. Crypto vs. fiat was our previous debate, but if that will be the case and fiat will devalue, then cryptocurrencies have a great chance of appreciating against fiat.
#2 Growing crypto derivatives market
Since the traditional cryptocurrencies lag behind in terms of regulatory compliance, a derivatives market based on crypto continues to grow in 2020 and will continue to do in the years ahead. As a result, investors will be attracted to invest in derivatives, with the main goal of diversifying their portfolio. Linked to the fiat devaluation (our first point), their quest for new assets could eventually lead them to cryptocurrencies, even though some of them are very reticent to invest.
#3 Diversification among institutional investors
When it comes to something new, people will always react with rejection at first, only to embrace the new as usual later on. This happened many times in the past and so will happen with cryptocurrencies. The trend is clear, and the world of finance is moving towards a deeper digitalization. Whether Bitcoin or Ether will replace fiat money is up to debate, but we can imagine a future world in which cryptocurrencies are assets like stocks or bonds and investors view them as diversification tools.
We’re talking about an early trend but as we move forward, cryptocurrencies will become an attractive investment among many institutional investors, propping demand and thus cryptocurrencies valuations in the upside. To conclude, we should also now forget that there are reasons why cryptocurrency prices could move on the upside, but that will be a topic for a future article.