Bitcoin Acts as Perfect Hedge to Conventional Financial Vehicles

Bitcoin (BTC) is currently priced in the $12,300 per unit range. Over the past 3 months, the price of BTC has literally doubled, with strong upside momentum remaining. Consider the April 10, 2019 price of $5283 per unit BTC, followed by $6387 per unit BTC on May 10, 2019, and $7954 per unit BTC on June 10, 2019. At the time of writing, Bitcoin’s price had broken through the $12,300 mark, with bullish sentiment pervading. The pricing mechanism of Bitcoin is based purely on supply/demand characteristics.

This cryptocurrency is not beholden to central banks, gold bullion supplies, or traditional financial elements. It was designed as an alternative to traditional financial systems, notably as a replacement for fiat currency and central banks. The frictionless, peer-to-peer blockchain technology underpinning Bitcoin is seen as a viable value-transfer mechanism with no need for intermediaries, high fees and commissions, or time delays. The current circulating supply of Bitcoin is 17.81 million tokens, with a cap of 21 million BTC based on an algorithmic model.

As at July 10, 2019, Bitcoin’s market cap hovers around $219 billion, with a 63.9% market dominance in a tightly-packed field of 2322 cryptocurrencies. It’s interesting to note that the top 5 digital currencies comprise a total market capitalization of $284.6 billion, with the entire crypto market valued at $344.27 billion. The heavy hitters (BTC, ETH, XRP, LTC, BCH) make up 82.7% of the total, and Bitcoin remains the undisputed majority shareholder in the crypto market.

The State of the Current Financial Markets

Traditional financial systems including the NASDAQ, Dow Jones, S&P 500, CAC 40, DAX 30, FTSE, Nikkei 225 and other indices reflect mixed performances. The US markets have displayed bullish sentiment ever since the recovery efforts (thanks to quantitative easing) from 2012 onwards. The current levels of US markets have the NASDAQ at over 8100, the NYSE at 13,100, and the Dow 26,700. However, markets tend to follow cyclical patterns and trends, and whatever goes up must invariably come down. The current bull run is one of the longest in recent history and concerns are mounting that a downturn is imminent. Unfortunately, poor US economic performance tends to drag down on global market performance.

Bitcoin, like gold, is seen as a hedge against market volatility. Recent price appreciation has come as a result of growing uncertainty in the world. Trade wars between the US and China, geopolitical tensions with the US and Iran, flareups in Venezuela, and fears of a downturn in economic performance are rife. In such situations, Bitcoin is perceived as a viable alternative. It is not subject to the constraints of highly regulated, central-bank-driven fiat currencies, and it offers hedge advantages as a result of its deflationary design (there will never be more than 21 million BTC), and its strong performance in 2019 to date. Consider that this crypto asset has driven gains of over 300% in 2019, with unlimited upside potential. Other traditional fiat currencies which also benefit from hedge status include the Japanese Yen (JPY). This currency was trading at 98.2345 (JPYUSD) in January 2019, and now is trading at 96.7964. While appreciation has taken place, it pales in comparison to the $6000 + jump in the price of BTC in recent months.

Bitcoin’s popularity is being fuelled in part by greater adoption among casual and institutional traders. Investors are also taking note, and seeing Bitcoin as a viable long-term proposition to add to their financial portfolio. Bitcoin proponents fear the worst with the trade war between the US and China, indicating that a bullish forecast is on the cards. Many traders and managers are now reassessing their take on Bitcoin, given that it appears to confirm value more so than governments and central banks can stabilize markets. While many have taken an upbeat perspective on Bitcoin, there is always the fear that a sharp reversal could send the nascent cryptocurrency on a freefall journey into obscurity.

European Central Bank Chair Christine Lagarde Seen as Crypto Amendable

Even the head of the European Central Bank (ECB) Christine Lagarde is reassessing her position on cryptocurrency. Once an outspoken opponent of Bitcoin, she recently announced that these digital currencies are shaking the system, indicating that she may be considering some sort of adoption of crypto assets. However, she prefers to err on the side of caution by maintaining the stability of the financial markets. Many crypto enthusiasts believe that her appointment to the ECB will bode well for the adoption and regulation of cryptocurrency. She may not be amenable to BTC specifically, but she is in favor of state-backed digital assets. Clearly, the adoption of digital tokens and blockchain technology by major financial institution such as JPMorgan, Facebook, and American Express will force institutional bodies to take a serious look at them.

Even in Asia, there are moves afoot in respect of digital currency adoption. The director of the PBOC (People’s Bank of China), Wang Xin was quoted as saying that Facebook’s Libra may be used for international monetary payments, transfers, and purchases, influencing global financial stability. As a result, the People’s Republic of China in Beijing has greenlighted the process to start designing a digital token for the country. China does not want the dollar-pegged digital currency to impact global trading activity in a dollar-centric digital currency realm. This will disproportionately benefit dollar-denominated trades and put China at the back of the line. Nonetheless, Bitcoin will benefit from these new initiatives in China. Among others, accelerated adoption of BTC is more likely.

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