Cryptocurrencies are benefiting from the current environment

Bitcoin is back – this impression is being created at least on the basis of the price performance of recent weeks. Having languished around the USD 4,000 mark at the start of April, the leading cryptocurrency recently reached levels of over USD 11,000. In addition, the number of daily transactions has increased significantly relative to the start of the year and has stabilised at a comparatively high level. Several factors can be considered as potential drivers of the cryptocurrency price, with the focus here on the growing tensions seen of late in the international political arena. Although the trade talks between the US and China recently showed some tentative signs of rapprochement, there is no doubt that both parties are still far from reaching an agreement. The situation surrounding the dispute between Washington and Tehran is even more serious. A US military attack on targets in Iran was called off only at the very last minute. The demonstrations in Hong Kong are also contributing to an image of international politics that is defined by considerable uncertainties.

Cryptocurrencies such as Bitcoin, that have the advantage of being independent of traditional monetary and financial systems, are likely to have been given a boost in recent weeks from another aspect. The main central banks worldwide have moved away in recent years from their propagated endeavours to raise key interest rates and hence normalise monetary policy. Expansionary measures were anticipated recently in the US and the EMU. The monetary watchdogs are already one step ahead in Australia and New Zealand, where key rates there have already been cut.

This is significant for Bitcoin & co. in two respects: On the one hand, the prospect of cheap, abundant liquidity supports investor demand for presumably riskier investments in the search for yield. On the other, a prolonged, ultra-expansionary monetary policy does little to promote public confidence in the stability of currencies or in the monetary system as a whole. Cryptocurrencies as well as gold seem to represent an alternative to some investors, especially in relation to the latter point.

Another point has recently steered public awareness and therefore also investor interest towards the cryptocurrency segment: namely the blockchain-based digital currency “Libra” planned by a Facebook syndicate. While this stablecoin that is planned for the first half of 2020 may still face numerous major hurdles, Libra could have huge potential to become a new single global currency. It is currently impossible to say whether this assessment will prove correct or if Libra might soon be filed away again.

There has been no change in recent weeks in the weak points of the leading cryptocurrency, including the absence of intrinsic value, a lack of acceptance among the general public and the high volatility. In fact, these were equally as pronounced at prices around USD 4,000 as they are now – just like the news about theft and rumours surrounding price manipulation. In other words, there is no guarantee that the recent upward trajectory will last or even represent the start of a new price rally. Nonetheless, it is clear that the aforementioned factors, which are likely to have contributed to the positive momentum, are not expected to disappear any time soon.

 

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