How Macroeconomics Shapes the Future of Cryptocurrencies: Key Insights You Need to Know

Introduction

In this article, we will discuss how macroeconomics impacts the future of cryptocurrencies. Questions such as: Will they be worth more in the future? Are they a viable investment alternative? Are they a reserve asset? Let's explore these topics.

First and foremost, it's important to clarify that nothing written in this post constitutes investment advice.

Understanding Fiat Money 

To begin with, we need to understand that a key factor affecting the purchasing power of fiat money is the exponential increase in the money supply, or M3.

Additionally, we must consider that an increase in the money supply allows central banks to buy more debt, reducing the cost of financing and supporting expansive fiscal policies (as witnessed in 2020). The problem is that when you significantly increase the supply of an asset, you automatically reduce its value or purchasing power. Moreover, artificially lowering the cost of money encourages borrowing. Remember, borrowing is essentially bringing future well-being into the present, but at the cost of slower growth later on.

Seeking Alternative Assets

With these principles explained, we conclude that holding your money in fiat currency guarantees a loss of purchasing power. Thus, you need to seek alternative assets such as:

Stocks: When valuations are attractive. (Currently, I don't see stock positions as appealing as in previous years).

Bonds: An option that is available only occasionally. (Not suitable for gradual investment through dollar-cost averaging).

Real Estate: Depends on the balance of supply and demand. (Each country has a different situation, but in many places, the real estate market can be a good investment).

Gold: One of the best assets for protecting against inflation.

Cryptocurrencies:A promise for the future but not yet proven. Cryptocurrencies haven't been around long enough to be thoroughly tested. It's important to note that Bitcoin's supply is capped at 21 million coins. New issuance decreases over time, and currently, 91%—over 19 million coins—are already in circulation. Thus, unlike fiat money, Bitcoin will not increase in quantity as it is a deflationary currency.

Apart from Bitcoin, other cryptocurrencies also have finite supplies:

• Litecoin: Maximum of 84 million coins.

• Bitcoin Cash: Same as Bitcoin.

• Ethereum: While not finite, with the implementation of Ethereum 2.0, the issuance of   new coins is expected to reduce significantly, shifting from a proof-of-work (PoW) model to a proof-of-stake (PoS) model. The growth rate is expected to drop from 3.8% to 0.2%, according to initial analyses.

Conclusion

The future of cryptocurrencies is uncertain, but the future of fiat money is not. It's likely that out of the approximately 8,500 cryptocurrencies in existence, many will disappear or end up with minimal value. However, the global adoption of such assets will probably continue to rise in the long term. (Nevertheless, some of the existing cryptocurrencies will have a bright future, while others not yet in existence could become major winners). A parallel can be drawn to the early days of the internet. We all agree that the internet has exceeded everyone's expectations, but how many of the ".com" companies from the early 2000s have survived to this day? I hope the reader takes this final thought to heart.