Investors often watch the Nasdaq 100 stock market index as a measure of the technology sector's performance. After it plunged by 33% last year, it's off to a more positive start to 2023, up 17% so far.

Cryptocurrencies followed a similar trajectory in 2022, with the total value of all tokens collapsing from a value of $2.2 trillion to just $800 billion. But cryptocurrencies, too, have ticked higher this year. Investors are starting to buy riskier assets as they speculate that the pressures on the economy caused by high inflation and rising interest rates might finally be easing. 

Bitcoin (BTC -5.19%), the industry's leading token, has surged by more than 60% in 2023. And the popular meme-token Shiba Inu (SHIB -10.90%) -- which delivered one of the greatest returns in financial market history in 2021 -- has gained 30%. Both are crushing the return of the Nasdaq 100, but are those runs likely to continue?

Inflation, interest rates, and the shortcomings of cryptocurrencies

Precious metals like gold and silver have been mediums of exchange for thousands of years. Up until 1971, the U.S. dollar's value was pegged to the price of gold, but since the global transition to fiat currencies, metals have served a different purpose. Gold is often used now as a hedge against inflation; investors believe it will always have value, so when inflation ticks higher and the value of the dollar declines, the expectation is that gold will generally gain value in dollar terms.

Bitcoin has become an increasingly mainstream financial asset over the past few years, and it's always the subject of fierce debate because investors struggle to value the token. It has no real use case. Bitcoin doesn't do anything. It doesn't produce income, and it has not been widely adopted as a currency. (Just 8,015 businesses around the world accept it as payment.)

Gold has many of the same shortcomings, but Bitcoin doesn't have a track record as a store of value that dates back thousands of years. It also can't be physically redeemed, so if an apocalyptic event ever happens, Bitcoin could disappear alongside the digital economy. 

Nevertheless, some investors liken Bitcoin to a digital, modern-day hedge against inflation. It's fast and easy to buy and sell, and its blockchain technology serves as a transparent yet secure record of ownership.

But there's a problem. By the time the U.S. consumer price index (a key measure of inflation) hit a 40-year high in June 2022, the price of Bitcoin was sitting 50% below its all-time high. In fact, it continued to crash for the remainder of the year, despite red-hot inflation. Gold, meanwhile, was basically unchanged in 2022 -- not a bad performance at a time when markets entered bear territory.

Speculation might be the only real use for cryptocurrencies

Now let's take a look at Shiba Inu, the most famous of meme coins. Anybody who bought the token on Jan. 1, 2021, and sold it at the end of that year would tell you cryptocurrency changed their life. They would have earned a return of 43,800,000% during that 12-month period -- in other words, had they invested just $2.30, they'd have banked over $1 million.

Today, Shiba Inu sits 88% below its all-time high, despite its 30% gain in 2023. As a currency for payments, it's even less useful than Bitcoin: Just 736 merchants accept it worldwide.

Unlike precious metals, Bitcoin and Shibu Inu have behaved exactly like risk assets recently. They recovered from their 52-week lows almost in lock-step with the stock market, and bottomed out between October and December last year, which gives credence to the idea investors are using the tokens to bet on loosening financial conditions -- or a risk-on investing environment.

The fact that those tokens don't generate income or add value organically will eventually catch up with them. As a result, it's unlikely they'll outperform indexes like the Nasdaq 100 -- which are filled with high-quality, revenue-generating companies -- over the long term.

Investors have learned one very valuable lesson this year

There will likely be a place for digital currencies in the future. After all, the rest of the economy is certainly trending further into the online realm. But will tokens such as Bitcoin or Shiba Inu be the answer, or are government-backed tokens more likely to assume the central roles in that arena? The latter outcome seems more likely, and that's a great thing. Why? Because of the collapse of SVB Financial, the parent company of Silicon Valley Bank.

See, thanks to the robust regulatory framework around banking, a bank that held more than $175 billion in customer funds collapsed this month without a single depositor losing any money. Silicon Valley Bank, which served many start-ups and technology-centric businesses, mismanaged its portfolio of high-quality bonds and government Treasuries. 

Estimates suggest the value of those assets will still be great enough to cover all deposits. Nonetheless, the Federal Deposit Insurance Corp. and the federal government stepped in and guaranteed customer funds anyway, which restored confidence, and ensured that account holders could access their funds in full the very next business day.

That is in stark contrast to the recent collapses of cryptocurrency projects and exchanges like FTX, or the TerraUSD stablecoin, which wiped out tens of billions of dollars in customer and investor money.

It serves as a wake-up call to all cryptocurrency holders. Decentralization isn't necessarily better, especially when conditions take a turn for the worse. That's not to say leading tokens such as Bitcoin won't rise in value over time, but the case for Bitcoin's long-term success as anything other than a vehicle for speculation appears fundamentally flawed.