The Great Cryptocurrency Wave of the Financial Markets

The undeniable rise of digital currencies is blinking on every radar in the financial markets. With the proliferation of FinTech start-ups over the past several years (especially in the wake of the 2008 global financial crisis), finance is in the midst of an infrastructural revolution; the use of artificial intelligence and open-source applications is rapidly gaining more momentum as viable ways to transact, move funds, manage bank accounts and interact with trusted third parties. No innovation, however, has been as disruptive as cryptocurrencies – a computerised form of money that is beholden to no central bank and typically uses an online ‘ledger’ as an accounting database through which users can send each other virtual money.

In 2017, cryptocurrencies have experienced an astounding rise in value, while major currencies and traditional safe haven assets hobble to the beat of the geopolitical drum. Due to their unregulated and decentralized nature however, many countries have started to be extra cautious with cryptocurrencies. Chinese regulators have issued a comprehensive ban on platforms that allow people to buy or sell virtual currency in China. They also cracked down on Bitcoin trading and Bitcoin exchanges, which prompted BTCChina, one of the largest Bitcoin exchanges in the country, to cease all crypto operations by 30 September.

While big banks and governments come to grips with how to handle cryptocurrencies, they have become too prominent in discussions, and in the actual markets themselves, to be ignored. As a result, many forex brokers have jumped on the bandwagon and introduced cryptocurrencies into their list of trading instruments. Jameel Ahmad, the VP of Corporate Development and Market Research at FXTM, states that “FXTM has been keeping a very close eye on cryptocurrencies, and the increased consumer demand for these assets on a global level. Our commitment has always been to provide our traders with tailored solutions that fit their investment needs and the demand for cryptocurrency trading has been too vociferous to ignore. Although we offered the option to fund accounts with Bitcoin some time ago, we have recently introduced the option to trade cryptocurrencies on CFDs.”

The rising tide

Bitcoin, the prototype crypto that was birthed in late 2008, is the most commonly known digital coin in the world. Back in 2012, one Bitcoin wasn’t even worth $20. Today, that same Bitcoin is valued at a massive $4,000. This year alone, the currency experienced a 350% price increase from January to August, while Ethereum (a cryptocurrency associated to its eponymous open source platform) shot up by 3600% between January and June. Other cryptocurrencies have followed suite, including Litecoin which rose by 1600% between January and July. 

Added to the fact that there is a growing trend to move away from centralized monetary systems, and a lack of trust in intermediaries often seen as impediments to efficient banking, the sudden surge of interest in digital currencies is tied to the recent upheavals that have shaken the traditional markets. Last year’s political shocks in the United Kingdom and the United States and the continuing tensions and political shakeups in the UK, North Korea, the US and the Middle East have all made traders wary. Naturally, this has significantly increased demand and fuelled interest in both consumers and institutions.

Are cryptocurrencies the new safe haven? 

This is one of the biggest questions currently circling the watercoolers in brokerages and financial firms across the world. Traditionally, cryptocurrencies have a reputation for volatility, which would make the wary trader stay far away. Once news of BTC China’s closure broke, Bitcoin’s value dropped by a $1000 over the course of a few days. Although it quickly recovered, these types of big swings are exactly what makes traders cautious. The huge price swings that Ethereum, Dogecoin and Ripple experienced in this year alone has also made investors jittery. Some other traders, on the other hand, have dubbed Bitcoin as ‘digital gold’.

In March, Bitcoin’s value surpassed gold – the longest-standing safe haven asset for investors – in value, when the Bitcoin Price Index (BPI) marked the value of a single bitcoin at $1,238.11 and Bloomberg reported $1,237.73 per ounce for gold. Since then, gold has been oscillating in the $1200s range, while Bitcoin’s value has continued to rise. The ongoing tension between the US and North Korea is a good example of how the two assets reacted during the early days of the feud: Bitcoin broke through the $3,000 barrier before breaking another record and reaching over $4,000 – in a matter of days. Gold responded similarly, from $1258.80/oz. in early August and a steady rise to $31 as the threatening rhetoric between the two nations escalated.

It’s not surprising that some investors are perceiving digital coins as an alternative investment, but given the circumspect relationship between traditional financial institutions and cryptocurrencies, it is definitely too early to call them safe havens. Those traders who do would benefit from also implementing rigorous risk management practises in their trading.

As things stand, other brokers will most likely join FXTM in offering cryptocurrencies as an investment solution, but they will need to properly educate their traders and make sure they understand all the risks entailed when trading cryptocurrencies.