Bitcoin Rides the Uncertainty Wave

The price of bitcoin soared to a new three-year high on Monday, surpassing the US$1,000 mark for the first time, in response to economic and geopolitical uncertainty in China following the U.S. presidential election.

The price of bitcoin stood at more than $1,025 in late trading on Tuesday, after rising to nearly $1,030, according to data from CoinDesk. The market cap was $16.49 billion. The price of bitcoin last reached an all-time high in November 2013, when it traded at $1,163.

The price of bitcoin is closely linked to events in the Chinese market, where the majority of trading still takes place globally and investors have been more willing to take risks with their decisions than in other parts of the world.

Chinese investors, in general, have been “more prone to exaggerate” or have high stakes in their investment and trading patterns, said Javier Paz, senior analyst for wealth management at the Aite Group.

The surge in bitcoin is closely linked to both the devaluation of the yuan and reactions to Donald Trump’s election, he told the E-Commerce Times, as the president-elect took a hard line stance on U.S. and China trade policy in campaign speeches last year.

“It’s a sign, I think, of the bullishness that we see coming from Chinese investors and the verbal nonintervention of Chinese authorities with regard to the fair value of the yuan,” Paz said.

Virtual Potential

Virtual currencies like bitcoin appear to have great potential as a future payment system that allows a more efficient and stable method of commercial exchange. However, governments have balked at the currencies, due to their association with underground and often illegal transactions, which is due in part to the difficulty of tracing payments through traditional financial systems.

Trump’s surprise election has shaken up markets and conventional wisdom across the globe. As a candidate, he consistently attacked the Chinese government for unfair trade practices and attempts to keep the yuan cheap compared to the U.S. dollar.

The yuan has slumped about 7 percent against the U.S. dollar in the past year, reaching lows not seen in more than eight years. In current trading, the dollar is equal to 6.96 yuan.

The yuan may become even more volatile versus the dollar. The China Foreign Exchange Trade System reportedly has reset the way it calculates the currency’s value in a key index, using 24 different foreign currencies in its basket, as of Jan. 1, compared with 13 under the old system.

“The continued weakness of the yuan underpins much of the increase in [bitcoin] price, while the increasingly restrictive capital controls within China are also key here,” observed Windsor Holden, head of forecasting and consultancy at Juniper Research.

“For example, the People’s Bank of China indicated at the end of last month that it would be tightening the rules regarding cross-border transactions from July. To protect against devaluation, more affluent individuals have been converting yuan into other currencies. With the perception that the fiat currency options are being restricted, bitcoin becomes a more attractive option,” Holden told the E-Commerce Times.

“However, there are additional factors at work here,” he continued.

“Bitcoin thrives on uncertainty, and the forthcoming Trump presidency brings us that in myriad forms: What impact will it have on trade deals with Asia and Europe? How will it impact on immigration and the domestic economy?” Holden wondered. “When you also factor in the confusion within Europe with regards to the outcomes that will result from Brexit, and the fears surrounding the possibility of nationalist parties winning elections in countries such as France and the Netherlands, then historically strong fiat currencies such as the pound, the euro, the yen — and the U.S. dollar itself — seem less attractive.”

Regional Acceptance

Bitcoin has been gaining acceptance and increased use in different parts of the globe, despite a great deal of internal debate about how to regulate and manage the cryptocurrency, observed Andrew Miller, a University of Illinois assistant professor who specializes in computer engineering and computer science.

In the U.S., the use of bitcoin has emerged on an ad hoc basis, from a regulatory perspective. The state of Illinois last fall announced that a consortium of state and county-wide agencies would launch the Illinois Blockchain Initiative, with the aim of becoming a regional center for blockchain and digital currency companies to conduct business.

The state released proposed regulatory guidance for digital currencies.

In Russia, the Ministry of Finance reversed an earlier plan to make trading in various cryptocurrencies illegal, Miller told the E-Commerce Times.

Another issue favoring bitcoin is that “numerous countries are embroiled in controversy over monetary mismanagement,” noted Jessica Groopman, a principal analyst at Tractica.

“According to Coinbase, searches for ‘bitcoin’ are at an all-time high in many of these very countries — India, Brazil, Nigeria, Venezuela,” she said.

“Meanwhile, Trump’s victory in the U.S. signals a generally lighter climate when it comes to regulatory hurdles,” Groopman told the E-Commerce Times.

“Also worth noting, Mick Mulvaney, Trump’s appointment for Budget Office, is an outspoken bitcoin proponent,” she pointed out.

“Whether Bitcoin’s value is sustainable in the long term is open to question; indeed, it is notoriously volatile,” observed Juniper’s Holden. “However, in a febrile economic environment where the old certainties have been swept away, and where the very existence of institutions such as the European Union are under threat, it is likely to thrive amidst the chaos.”

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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