“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.”
Mohi-uddin points out that huge price volatility of Bitcoin in the past 12 months and the manner in which it plunged along with conventional assets in March 2020 as two major indications that it is yet to transform into a stable store of value.
“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. 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.”
He has reservations about the likelihood of cryptos susbstituting fiat currency, but trusts that Bitcoin’s shortage is totally contradictory to the present period of fast money printing and ultra-loose monetary policy.
“Governments are very wary of any technology that could potentially displace national currencies. This would reduce the ability of policymakers to print money during economic crises.”