20 May 2022
Over the last month, the value of a Bitcoin has fallen from £31,364 ($41,149) to £24,267 ($29,748), a fall in excess of 20%. Looking further back, in November 2021, Bitcoin hit just over £48,000 ($64,000) and has since fallen by nearly 50% in sterling terms. So is this the beginning of the end or the start of a new chapter for cryptocurrencies?
In light of concerns regarding interest rates, inflation, the cost of living crisis and the Ukraine conflict, many traders have been de-risking their investments. While cryptocurrencies are currently unregulated, the market is enormous, with Bitcoinalone worth over $500 billion, down from the high of $1 trillion. There is a growing feeling that, similar to banks during the US mortgage crisis, the cryptocurrency market may be literally too big to fail?
Having risen exponentially from but a fraction of a dollar, the story of Bitcoin alone is one of enormous growth, all within less than a decade. Consequently, as the leading light of the market, the value of Bitcoins has been highly volatile. Many traders tend to work on technical indicators as a means of forecasting short-term price movements. So it was interesting to read that numerous experts see the recent fall through the $30,000 level as the failure of a critical support line. Consequently, we may see further heavy selling in the short term.
One area of importance, often overlooked by inexperienced traders, is stablecoins and their role in the marketplace. These are cryptocurrencies, but they are pegged to specific assets. This may be another cryptocurrency, a mix of assets or a traditional currency such as the dollar. Effectively seen as a “holding” currency, often used to park funds awaiting investment, they are crucial. They give the backbone to the cryptocurrency exchanges and are perceived to be “fully backed” by tangible assets.
One of the leading stablecoins is the Tether which is pegged to the US dollar and backed by the equivalent US dollar deposit. In theory, the Tether stablecoin should always trade at par value. However, recent market concerns have seen this peg come under threat.
Over the last few days, the Tether stablecoin has been sold down to as low as $0.95 before rebounding. While these coins can be susceptible to short-term volatility if significant positions are liquidated quickly, this tends to attract the interest of arbitrageurs. Unfortunately, arbitrageurs are not as keen as they once were to take advantage of the current market climate. This would usually be perceived as a perfect short-term situation.
Interestingly, some stablecoins such as Binance and USD are trading at a premium to their peg. This could indicate a flight to quality amid uncertainty regarding the assets backing more speculative stablecoins. However, recent pressure on the Tether stablecoin has prompted the exchange responsible to confirm there are sufficient assets to redeem at par value to the dollar. Consequently, the idea of a flight to quality would not appear to stand up to in-depth scrutiny. More uncertainty!
Due to the relatively recent inception of cryptocurrencies and stablecoins, this is not a situation investors have experienced before. Consequently, there is confusion and varying opinions.
In some shape or form, the idea that cryptocurrencies are "too big to fail" is building traction. There is also a realisation that regulations are on the way. The Financial Conduct Authority (FCA) has issued numerous warnings to investors considering adding cryptocurrencies to their portfolios. However, the future regulatory framework surrounding this relatively new sector is slowly but surely beginning to emerge.
It looks as though ongoing investor uncertainty and relatively unique market activity will cause a significant shakeup in the cryptocurrency sector. While investors welcomed the emergence of literally thousands of cryptocurrencies in recent times, we may now be moving to the "survival of the fittest" end game.
History shows this is an inevitable conclusion to new and innovative investment markets. However, global and crypto market-specific issues have driven prices down in what could be perceived as a perfect storm. The ongoing de-risking of investments by many traders is feeding this ongoing storm.When will it end?
Here at Global Investment Strategy UK, we closely monitor the emergence of new investment markets with cryptocurrencies continuing to grow in popularity. While unregulated at the moment, this is likely to change in the short to medium-term, which will attract day traders, arbitrageurs and long-term investors. Consequently, our competitive charging structure will approve crucial, allowing traders to maximise returns.
Schedule of Charges
+44 (0)20 7048 9400
Email Us
Client login
