Digital Currency Revolution Series: Can macro backdrop, geopolitical surface attract Bitcoin as reliable option?

The bulls managed to reclaim Bitcoin price to $13k mark levels as the financial institutions are infusing investments into the crypto industry, this has been the major driving force that the prevailing bull run of Bitcoin prices.

Another significant factor in the ongoing bullish price run may be increasing demand for Bitcoin as a hedge against macroeconomic uncertainty.

Well, to better understand Bitcoin’s potential role as a hedge against liquidity risk, we run you through the cryptocurrency market functions and the industry developments in the prism of quite a few macroeconomic developments. 

The mounting geopolitical risk and tighter financial conditions in the US leading to global growth concerns and weakness in the currencies of major US trading partners. (September – December 2016).

Escalation of US and China trade tensions posing systemic risks to global economic growth and placing further pressure on the RMB.

A manipulative currency mechanism (as per Trump’s allegations) and shift in the monetary policy by the People’s Bank of China (PBoC) due to the lingering trade and economic apprehensions in China and structural devaluation of the renminbi (RMB) from last 2-3 years.

Against such geopolitical surface and macro backdrop, the easing in global financial conditions sends two related indications. First, with credit still flowing and rising wealth and lower borrowing costs supporting households, those sectors not directly influenced by the business sentiment shock are unlikely to pull back aggressively, short-circuiting any adverse feedback from the initial shock.

Second, policymakers have maintained credibility particularly in the US and China and are using this to bolster expectations. In the Fed’s case, a reaction function shift toward encouraging an inflation overshoot reinforces the effects of a normal risk management exercise.

Consequently, the risks have now been skewed towards the weakening of high beta FX vs defensive currencies such as CHF and JPY if the conflict persists or escalates. And quite a few EM Asia FX forecasts were downgraded by 1.5% to 2.5% over the 1y horizon. 

While Grexit and the 3-week Greek bank shutdown amid sovereign debt restructuring remind sparking a physical liquidity crisis during 2014-15.

Well, most importantly, the current Brexit saga in conjunction with a steep and steady downtrend in the pound sterling (GBP) and euro (EUR) prices.

Amid such scenarios, we reiterate that the open interest for bitcoin futures on CME has surged bit by bit MoM basis. Open contract numbers have risen to a record-breaking 6,096 by the end of June. This could be mainly due to the mounting demand from institutions and professional traders for the trade during the cryptocurrency avenues rallying to record highs in 2019. But, it could be an alternative option for the global crisis as the investor class in the dynamic finance arena is ultimately cognizant about Bitcoin and other crypto peers in the same light as a potential safe haven role during the economic crisis, contemplating the very essence/need for the invention of cryptocurrency during 2008. Having mentioned that, we are neither inclined nor prone to this space, only time should decide whether it would be a boon or boom for crypto-industry in the next decade. But on a concluding note, wish to add a famous quote by Warren Buffet, wise to be fearful when the entire world is greedy, and vice versa.

By Niranjan Patil
  • Market Data

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