Delving into the valuation of cryptocurrencies as stores of value, we explore their demand during crises, potential to gain market share from traditional safe-haven assets and the factors that contribute to their resilience amidst uncertainties. This article is part of Sygnum’s Valuing crypto assets investment research report.
Store-of-value assets, such as gold, are not productive and do not generate an income. In fact, they attract a negative income, as they typically incur storage costs. The fundamental drivers of the value of these assets are supply and demand.
While supply and demand both fluctuate in the case of precious metals, the supply of cryptocurrencies is perfectly predictable, so valuing them as store-of-value assets hinges on estimating the demand.
The drivers of demand are partly the same for all store-of-value assets, namely the overall need for safe-haven assets based on the (actual or perceived) state of global or certain local economies and the financial system. Governments’ decisions to use certain assets as reserves also play a pivotal part.
When there is a high interest in safe-haven assets, the demand for both precious metals and cryptocurrencies can rise without a change in their relative market shares.
A second source of demand for cryptocurrencies as stores of value is taking market share from traditional safe-haven assets. This may be driven by an assessment of the qualities of the various alternatives or it may be simply a decision to diversify.
As safe-haven assets are by definition bought to provide security in a crisis, and the precise nature of crises is hard to predict, it makes good sense to use a combination of store-of-value assets.
When cryptocurrencies are assessed on the required qualities for a good store-of-value asset, some cryptocurrencies compare favourably to gold. Bitcoin in particular does better on scarcity, authenticity (difficulty to forge), portability, divisibility and storability than gold. It is similarly permanent but has lesser widespread acceptance than gold.
GOLD MARKET CAPITALISATION (USD TRILLIONS)
The valuation of cryptocurrencies as store-of-value assets involves an assessment of the overall demand for safe-haven assets and any expectation of the cryptocurrency taking market share from other store of value assets.
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