Is bitcoin the new safe haven for investors?
Looking at how bitcoin has been well-received in various markets including the UAE, Mark Leigh, Chief Operating Officer at Xtrade advocates that it is an investment that is worth contemplating.
During 2016, bitcoin investments realised unprecedented success earning superlative returns at well over 110 per cent, overwhelmingly surpassing all other publicly traded asset classes. The total market capitalisation was valued at more than $15 billion which now exceeds the 2013 peak and is at a record valuation in relation to the pound and euro, encouraging investors to explore this unconventional savings channel especially during these times of escalating geopolitical uncertainty.
Bitcoin is a form of digital currency that is created and held electronically. No one controls it and they are not printed like dollars, euros, dirhams and riyals. They are produced by people—and businesses—running computers all around the world, using software to solve mathematical problems.
Furthermore, it is the first example of a rapidly growing category of money known as cryptocurrency and can be used to make electronic purchases and can also be traded digitally via online trading platforms, just like other currencies. What makes it unique in relation to conventional money is that it is decentralised, meaning that no single institution controls the bitcoin network.
One of the key reasons as to why investments in bitcoin surged during 2016 was nervous Chinese investors responding to arbitrary Beijing authorities, whose latest tirade is against insurers’ stock purchases and leveraged buyouts. They were also concerned about government and corporate bond selloffs, particularly at the short-end of the curve, likely reflecting Wealth Management Product redemptions as well as the tightening of capital controls of the yuan that has squeezed renminbi availability in Hong Kong, driving up the three-month yuan HIBOR rate.
In addition, Chinese investors are also concerned about the continued decline of the yuan resulting from the usual data transparency, state-inspired asset bubbles, as well as potential interest rate increases, making bitcoin an interesting investment hedge for 2017.
From a global perspective, the unsettling political, security and economic events of late 2016 such as the volatility of the Euro has motivated the replacement of centrist leaders with populist xenophobes and manifested itself in the inability of financial institutions and governments to cope with successive crises.
Furthermore, there is evidence of inflation rising from around the world. Price pressure is intensifying in the Euro zone, with, for example, manufacturing input costs rising at a 56-month record in November. Similarly, the rise in UK businesses’ costs over the past two months has been the steepest in over five-and-a-half years.
Investments in bitcoin is a well-positioned response to challenge the governing elites and their ‘mainstream’ financial system. As it is traded in cyberspace and mined by code-breaking computers, it is further gaining popularity among some investors as an alternative safe-haven primarily because it exists outside government regulations and is less subject to monetary policy.
Recently, its natural safe-haven competitor gold has staggered for reasons not central in bitcoin valuation—such as rising USD and US Interest rates.
Reputable organisations are also looking to add a digital offering to their portfolio. At the end of 2016, the Royal Mint and CME Group announced a gold and blockchain ‘solution’. The two parties will collaborate on a digital gold asset called Royal Mint Gold (RMG) and will ‘transform the way traders and investors trade, execute and settle gold’.
For traders, there is still uncertainty when it comes down to the legitimacy of bitcoin. However, companies such as Tesla Motors, Virgin Galactic, Dell as well as the Pizza Guys Restaurant in Dubai, UAE, are already accepting bitcoins as a form of payment and in the future, we would most likely see more global and local companies adopt this payment method.
Will bitcoin be a safe-haven for investors? Only time will tell. However given the direction it is taking, the fast paced adoption by world renowned organisations, and the rapid shift in consumer demand to use digital forms of payments as opposed to traditional paper currency, one can certainly state that at this moment in time, it is an investment that is worth contemplating.