By RICARDO EVANGELISTA
By the current year’s standards, 2017 was pretty average.
In January, Donald Trump was sworn in as the 45th president of the United States and a few months later, in May, the #metoo movement gained notoriety, following scandals involving big showbiz names such as Harvey Weinstein and Kevin Spacey.
But, at least from the financial markets’ perspective, the appearance of blockchain based currencies in the radar of mainstream investors was the most remarkable fact.
As the year approached its end, investors became increasingly excited about crypto currencies and by December Bitcoin reached its all-time high of almost US$20,000 per coin.
Since then, the most iconic crypto experienced wide fluctuations in value, dropping down to US$3,300 barely 12 months after reaching its peak, following a string of coin thefts from exchanges, and lack of traction in the real economy.
Fast-forward to the present time and interest in crypto currencies is once again surging.
There is a real possibility that by the time you’re reading this, bitcoin has surpassed its previous peak of US$20,000. But then again, it is also possible that the trend reverses; such is the nature of the financial markets.
So, why are investors and speculators once again increasing demand for cryptos and driving up the prices? There are three main reasons behind the emergence of this pattern: Firstly, the technology behind the assets; cryptos are based on blockchain technology, an electronic ledger distributed across a network of computers, which makes it immune to manipulation.
Secondly, Low interest rates means traditional investment vehicles, such as government bonds, deliver negative real yields, triggering the quest for alternative ways to generate return on investment.
Finally, after years of relegation to the darker corners of the internet bitcoin is now being accepted by mainstream payment systems, such as PayPal.
The challenges brought by the coronavirus forced central banks to increase monetary easing and to lower interest rates. In the past such moves ultimately led to the escalation of inflation with currency devaluation occurring as the result.
The recent vaccine breakthroughs boosted hopes of a quicker than expected rebound in economic activity in 2021, supported by massive governmental investment which will require more borrowing and the continuation of low interest rates; it does indeed appear that a steep rise in inflation could be looming on the horizon.
For this reason, large institutional investors, that in the past avoided deviating from traditional instruments, now see crypto currencies, and their independence from central banks, as a way of hedging against inflationary risks.
The rally of 2017 was driven mainly by retail speculators, encouraged by the novelty appeal and perhaps idealistic views of the outsider status of bitcoin.
To a large degree, the absence of large backers was the reason for the quick trend reversal and drop in value.
In 2020, the second crypto rally is being supported by the demand from institutional investors and greater traction in everyday use, so perhaps this time it will be sustainable.
Still, as many traders can testify, the financial markets’ mood shifts rapidly, and trends can easily be reversed.