Anyoption analyst Elise Blanford takes an interesting look at what is happening right now in the cryptocurrency market, as Bitcoin is leading a charge upward in prices. For more of Elise’s research see the Anyoption blog.
While Bitcoin has had a particularly tumultuous year, the recent surge higher in prices comes amid numerous factors contributing to uncertainty across the globe.
With major monetary policy decisions waiting in the wings, investors have been parking more money in alternative financial assets as a means to hedge against the uncertainty in the lead up to the Brexit referendum and upcoming FOMC meeting.
However, one of the main drivers behind the substantial momentum higher in prices remains the exodus of cash from the Chinese mainland with digital currencies one of the few remaining mechanisms for circumventing capital controls. Further weakening of the Yuan might quicken the pace, sending Bitcoin prices surging as they increasingly become a proxy for funds trying to escape the mainland.
Lastly, plans to reduce mining and supply might see Bitcoin prices push higher as scarcity adds to potential upside.
The China Effect
Owing to its relatively decentralized nature, Bitcoin has seen its popularity once again find traction amongst investors looking for uncorrelated market returns in an effort to hedge against the rising tide of uncertainty encircling the global economy. When it comes to bypassing capital controls implemented by Chinese policymakers, Bitcoin is a highly effective tool for converting and moving funds anywhere across the globe within a matter of minutes before converting back to a paper currency of the user’s choice.
For those with wealth on the mainland that are trying to find creative ways to exceed the limits imposed on outflows, Bitcoin has become the tool of choice. If policymakers continue to weaken the Yuan, which is trending new 5-year lows in response to a rising US dollar, this could see the pace of outflows accelerate dramatically over the coming months.
Brexit and the Fed
Two events that have been widely viewed as a predominant upcoming financial market risks are the FOMC Decision due on Wednesday and the UK’s EU referendum vote to be held later in the month. While not directly impacting the digital currency environment, the added layer of uncertainty has contributed to ongoing risk aversion as evidenced by the recent rise in gold prices. Heavily reduced expectations of an imminent interest rate hike combined with weak labor data are giving poor visibility on the timeline for any tightening.
This implies that the FOMC Statement and subsequent press conference will be of critical importance in understanding the outlook for policy. A shorter timeline might see the US dollar reverse from recent losses, bringing gold prices back down to earth. However, gold is showing a strong correlation of 0.8416, meaning any further gains could potential stoke further upside in Bitcoin.
While Brexit is further down the line as far as upcoming fundamental decisions with serious event risk, it does nevertheless add to a sense of caution prevailing in financial markets. Hesitant business investment and weakness in several critical indicators such as consumption and inflation are inevitably the result of fear about the outlook and its impact, quite literally paralyzing activity in certain sectors.
Increased polls suggesting “Brexit” votes overtaking the “Bremain” camp by a wide margin is further testament to the uncertain view ahead for the economy. The impact of an exit on trade and economic ties is not yet quantifiable, potentially contributing to upside in Bitcoin as individuals look to hedge against the risk.
Supply To Decrease
Unlike traditional currencies that are printed by a centralized treasury or other government institution, Bitcoin is mined. While not mined in the context of extraction from the ground like precious metals or other commodities, Bitcoin is created when “miners” unlock new Bitcoins by solving complex mathematical problems. However, according to a procedure that is built into code behind Bitcoin, during the month of July the supply of Bitcoin is expected to fall as the incentives for mining are slashed to half in an effort to ensure the integrity of the digital currency is maintained. As a result, the forces of supply and demand are back in action, potentially pushing Bitcoin prices higher as investors take positions in the digital currency ahead of the changes.
Correlation Is Not Causation
Even though statistics enthusiasts will be quick to shoot down the idea that Bitcoin is rising in tandem with weakness in the Dollar or Pound, there is no denying a relationship exists, similar to the Yuan and how outflows are influencing gains in the cryptocurrency.
What is apparent is that despite being a decentralized currency, Bitcoin is still sensitive to developments in other financial assets. Although there are many factors behind the meteoric rise behind bitcoin, the one thing that remains certain is that increased buying from China and slow production will invariably drive further price appreciation.
As adoption continues to grow and more money seeks to escape from China to circumvent capital controls, Bitcoin volume and prices may continue to ascend as faith in the power of decentralized institutions gains favor amongst investors.