Cryptocurrencies had performed well so far in 2020, mainly due to several tailwinds that continue to drive prices on the upside. Bitcoin buyers had returned recently, pushing the price past $11,000 once again, while also supporting the entire market. Both large-cap and small altcoins are again on the rise, suggesting a new longer-term bull market might be on the horizon. If that’s the case, what are some of the underlying fundamentals driving cryptocurrency valuations on the upside?
#1 Fiat devaluation
As Ray Dalio, famous US investor and co-founder of Bridwater Associates, pointed out several months ago, “cash is trash”, suggesting both retail and institutional investors are not eager to hold cash when interest rates are at all-time lows and governments finance excessive spending via fiscal deficits.
In such an environment, fiat devalaution via inflation looks like a done deal over the next few years, which means financial assets will continue to rise in value. That’s applicable for cryptocurrecies as well, especially if we consider that most of the tokens have a limited supply, thus inflation can be controlled easier.
#2 Crypto liquidity increase via DeFi apps
With the decentralized finance developments, we now have some sort of financial industry for cryptocurrencies. Investors can store tokens in DeFi apps using smart contracts and lend them out in exchange for interest, increasing the overall liquidity in the market. With increasing crypto liquidity flooding the market, cryptocurrency valuations are subject to further appreciation.
Does that mean it is the common denominator moving forward? Absolutely not and we need to deal with crypto based on different market conditions. Still, now that there are is reliable cryptocurrency lending mechanism that’s functional, the market will be able to run on excess liquidity. Could it create a new cryptocurrency bubble? Depending on far cryptocurrency lending will be extended, yes, but that would be a topic for one of our next articles.
#3 Increased retail and institutional investments
Central banks are buying everything until the COVID-19 pandemic will be over and on top of that, fiscal/monetary support is expected to persist for several years to come. In such an environment, risk appetite from both retail and institutional investors increases, leading to surging market valuations. As long as there will be high interest for crypto, we should expect to see prices moving north, despite the critics suggesting valuations are completely decoupled from fundamentals. They are true, but until the easing will stop, price discovery will not start to unfold again.