Can You Count on Cryptocurrencies?

The launch of the first cryptocurrency in 2009 coincided with sharp cuts in global interest rates. For more than a decade, interest rates remained at historic lows—encouraging investors to consider riskier assets such as Bitcoin and its rivals.

Now that the economy has finally turned, the unpredictable performance of crypto may look far less appealing. Those affected by recent collapses, notably the rapid rise and fall of FTX, might well be heading for safe havens.

Yet in the long run, these episodes may be judged to have proved the long-term resilience of cryptocurrency. Total crypto market capitalization crept back up to $1.8 trillion by January 2024, after a profound dip in mid-2023.

Bitcoin has enjoyed an especially good run, increasing its value by almost 160% in 2023. And US regulators’ recent approval of spot Bitcoin exchange-traded products (ETPs) such as ETFs—after years of resistance—represents a crypto breakthrough that could boost the market. 

A high-inflation, high-interest-rate environment should benefit those investing in stored-value assets such as gold—and Bitcoin. So, will 2024 be a watershed year for crypto—the point at which virtual currencies become a useful diversification in any portfolio?

Safe haven?

The case for crypto as an inflation hedge does not stand up for all virtual currencies. For example, many stablecoins are pegged to the US dollar, and are thus vulnerable to inflation—though some also offer rewards, which could alter value outcomes.

Scarcity is what provides crypto’s real bulwark against inflation. The scheduled tapering of the Bitcoin supply, for example, means its availability is known and limited, in contrast with the excess money printed by central banks.

“Crypto assets could theoretically be a hedge against inflation,” the ratings agency S&P Global declared after a recent study. However, it added a caveat: “We think the track record of crypto is too short to prove this.” 

Nevertheless, there are territories where crypto is already a widely used safe haven against inflation. Ownership of digital currencies has surged in countries with soaring prices and crumbling currencies. Turkey (27.1%) and Argentina (23.5%), both hit by severe currency devaluation, ranked highest for crypto ownership in 2023, according to GWI research.

Positive volatility

This trend suggests that the popularity of crypto is spreading from its traditional domains in international financial centers. Sheraz Ahmed, Managing Partner at blockchain solutions provider STORM Partners, predicts the reach of digital currencies will extend further in 2024, and points to their potential in Brazil, a market of 200 million people, where “they are regulating crypto in a rather friendly way.”

Ahmed suggests that exposure to crypto assets has the potential to provide higher yields than conventional investment vehicles. Their wilder fluctuations, he contends, are partly tied to cryptocurrency markets’ round-the-clock operation, while traditional markets stick to working hours.

“You have higher volatility, and thus opportunity. It’s more liquid, as well. There are no intermediaries or friction; things happen very much globally. So, there’s very high liquidity and the ability for more emotional decisions to be made,” he explains.

Crypto leader

For Ahmed, Bitcoin stands alone in the market, and he categorizes it as a commodity—the digital equivalent of gold. However, he believes that Bitcoin is not achieving its full potential, largely because it is being suppressed not only by traditional industries, but by the reluctance of crypto players themselves to see their leading advocate go mainstream.

“Bitcoin is pulling itself down by playing in the kindergarten playground. It is acting like that stubborn child that doesn’t want to graduate,” he says.

Bitcoin is also singled out by Nicolas Palacios, an experienced trader in the Team Pro cadre formed by Exness, one of the largest multi-asset brokers in the world.

Palacios points to Bitcoin’s 21-million-coin limit as its main anti-inflationary asset, but he also sees potential in a rival cryptocurrency. “Ethereum is interesting, as well, since it has a lot of activity,” he says. “It could be deflationary, based on the fees burned when you have transactions.”

Energy intensity

With climate change high on investors’ agendas, one factor that counts against wider cryptocurrency adoption is the heavy environmental cost of crypto mining. Digital currencies such as Bitcoin that operate on a “proof-of-work” basis are far more energy-intensive than those using a “proof-of-stake” model, such as Ethereum and Solana. However, Ahmed argues that proof-of-stake currencies are less secure, since they allow players with higher value in the network to exert more power on the blockchain.

“Bitcoin is becoming more resilient, and other chains that are opting for a different consensus mechanism are becoming weaker. As they enter into the larger world, they are going to be vulnerable to hostile takeovers,” he says.

Increasingly, Bitcoin is pairing its substantial energy requirements with social responsibility initiatives. For instance, Kenyan company Gridless, backed by Twitter founder Jack Dorsey, is establishing Bitcoin mining sites across Africa that will fund the supply of energy to communities too impoverished or isolated to connect to power grids.

Knowledge gap

Palacios and Ahmed both see the SEC’s Bitcoin spot ETF approval as a positive sign for the wider embrace of crypto in 2024.

Palacios counsels traders to follow crypto news closely, and to consider a “buy-the-rumor, sell-the-news” trading style. “The biggest challenge is acquiring real knowledge about how Bitcoin works—it’s not easy to understand,” he adds.

Ahmed agrees. After eight years working in crypto, he still hesitates to describe himself as an expert. Deep research can give investors an edge, he says, but “before going too far down the rabbit hole,” he warns, “what you do then is give your money to a professional investor.”

General Risk Warning

Investments in cryptocurrencies are considered by many to be speculative investments that involve a high level of risk, including a partial or total loss of invested funds. Exness services relate to complex financial products that may involve leverage and therefore could involve an even higher level of risk of losing money rapidly. This material is for informational purposes only, is subject to change, and should not be relied upon as research, investment advice, or a recommendation regarding any particular investment products or strategies.