Bitcoin as an oasis of stability

15.03.2019 13:47|Bartosz Grejner

"The Federal Reserve's monetary policy, the global economic slowdown, Brexit, trade negotiations between the US and China - these are the recent events that have caused huge fluctuations in the equities, bonds and currency markets but have little impact on cryptocurrencies. This may be a useful signal for investors," writes Bartosz Grejner, Conotoxia Analyst.

The prices of the most popular cryptocurrencies are staying put. For nearly a month, the price of bitcoin has been moving in a very narrow range of about 3.6-4 thousand USD. At the end of November to the present day, they have been the range of approx. 3,150-4,300 USD. It is really not much when it comes to the fluctuations of cryptocurrencies to which we are accustomed. Of course, earlier there were significant drops - at the turn of 2017 and 2018, or even in mid-November last year, when there was a rapid drop in Bitcoin's price from 6.5 thousand USD to almost half this value. However, the current state is not necessarily a bad thing. Taking into account all economic and geopolitical events, the stabilisation of cryptocurrencies can even be taken as a huge advantage.

When stability prevailed in the cryptocurrency world, the equity market experienced a real rollercoaster. In three weeks of December, the largest market indexes in the US - such as Dow, S&P500 or Nasdaq - lost more than 15% in three weeks. From the Christmas Eve to the present day, they pared the losses and even gained about 20 per cent. The fall was caused by fears of a stronger than expected economic slowdown in the eurozone - which have eventually materialized, the prospect of interest rate increases in the US has come to pass, trade negotiations between the US and China are still in progress. The later pick-up on the other hand started on a dovish Fed and trade optimism.

Almost simultaneously, after reaching the annual lows of the pound (in relation to the dollar), the British currency gained to this day more than 6%. This is due to the endless spectacle of Brexit. The daily volatility's range of the pound sometimes reaches a few percent, which happens in the case of emerging countries' currencies. Meanwhile, here we are dealing with one of the most liquid currency pairs - GBP/USD.

In all economic and political turmoil, the behaviour of cryptocurrencies’ prices may surprise. It seems that they are to a large extent insensitive to events such as Brexit, slowdown in the largest economies or monetary policy of the largest central banks. This close to zero correlation with traditional assets is very attractive from an investment point of view, i.e. portfolio diversification, which can significantly reduce risk. Although when it comes to cryptocurrencies, there are still a few major obstacles preventing them from being used in such a way. One of them is the price drop over the last several months. The advantages of diversification disappear if it turns out that cryptocurrencies remain in a downward trend and if the current stabilisation is only temporary.

The changes in the law, which could be just around the corner, may come in handy. The implementation of cryptocurrencies by large and recognisable global companies, such as JP Morgan or Facebook, probably opens the eyes of politicians responsible for implementing such changes. Last Tuesday, Kevin McCarthy, leader of the US House of Representatives, admitted that "blockchain is changing and revolutionising the security of the financial industry", suggesting why Congress should introduce this system to be "effective, efficient and liable". While McCarthy did not refer directly to cryptocurrencies, blockchain technology is the foundation of most of them, including Bitcoin. Although the risk of further price drops cannot be ruled out, recent months have given a positive signal for the rest of the year, both for the average consumer and financial institutions.

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