crypto vs. fiat in 2020

Why Cryptocurrencies Have an Upper Hand Against Fiat?

This would have been ironic a few years ago, but in 2020 cryptocurrencies seem to be the real winner as compared to fiat money. Looking at the past three months, the crypto market is trading in the positive territory year-over-year, an unlikely scenario, if we consider a new economic downturn is already unfolding. The reality sometimes takes us by surprise and all we can do now is to understand why cryptocurrencies are the ones in advantage.

Currency debasement

Governments around the world need to take unprecedented actions to control economic activity since COVID-19 had created damage not seen in a century. Decades-record unemployment rates, weak revenue, and spending will weigh on the entire year and probably into 2021 as well, which brings currency debasement into the equation. Fiscal and monetary interventions will have a limited impact and the ultimate solution is to devalue currencies to inflate GDP. Cryptocurrencies will benefit, especially if we consider their valuations against fiat money and already investors are pouring money to protect themselves from what will happen with the money we all know.

Deflationary pressures

One of the main fundamentals of cryptocurrencies is that their supply increases at a slower pace over any given period, acting as a deflationary pressure. Fiat money, on the other hand, can be heavily influenced by central banks. Either through reduction of interest rates or via the printing of money, the money supply increases exponentially, and thus the currencies’ ability to work as a store hold of wealth diminishes. Considering central banks can’t print crypto or influence valuations, it’s obvious cryptocurrencies have a clear edge.

Liquidity abundance

When interest rates are zero + central banks print money, all asset classes are benefiting due to liquidity abundance. It’s still a question whether cryptocurrencies will remain decoupled from other assets, but up until now, widely available liquidity had made investors confident to invest in crypto, even though these assets had proven to be volatile over the years.

For now, Bitcoin had cracked above $9,000 and continues to trade above that level, suggesting buyers are still buying the dip. The same is happening with most of the large-cap tokens, raising the prospects for the short-term. Conditions can change at any point, if risks start to weigh heavily again, but right now markets are flushed with liquidity, and cryptocurrencies are benefiting.  There is no doubt cash is under pressure, while the deflationary tendency of crypto works as important leverage.