Cryptocurrency bounce could be catalyst for mainstream use

07:04 | 09/11/2020

Global market fluctuations, as well as mainstream organisations and central banks’ ambition to launch digital currencies, are seen as an endorsement for crypto asset activities, while gold is meanwhile still proving its glitter as a safe-haven investment worldwide.

cryptocurrency bounce could be catalyst for mainstream use
Digital currencies are bouncing back in value akin to several years ago

The price of digital currency Bitcoin has surged about 120 per cent since the beginning of the year, trading as high as $15,700 at the end of last week, according to media outlet CoinDesk. That marked the highest level since January 2018, when it was coming down from its record high of $19,780 set in the previous month.

Since the massive global market rout on March 12, Bitcoin has risen over 323 per cent since the crypto asset’s 2020 low of $3,600, data from Bitcoin.com revealed.

Market watchdogs believe the recent surge of cryptocurrency is closely linked with Bitcoin’s potential, being viewed as a hedge against inflation amid the volatile global economy.

The blockchain-based currency has been racing to build a better, sound infrastructure for investors, creating everything from exchange-traded funds to options markets and custody services. Its potential use as a payment option even got a surprising boost last month when PayPal, the world’s leading online money transfer services provider, signalled it would allow users to directly buy and sell Bitcoin in their digital wallets.

PayPal president and chief executive Dan Schulman highlighted, “The service will encourage global use of virtual coins and prepare its network for new digital currencies that may be developed by central banks and corporations.”

The news of PayPal’s entry into the cryptocurrency space could be a huge endorsement for crypto assets and fuel stronger demand for mainstream organisations to purchase Bitcoin and other digital assets. PayPal has 346 million active accounts around the world and processed $222 billion in payments in the second quarter, according to Germany’s database company Statista.

Also in October, international financial authorities and 20 of the world’s largest economies announced they would establish official standards for regulating and issuing sovereign digital currencies.

The G20, consisting of finance ministers and central bank governors representing the European Union and 19 countries – said it is working with the International Monetary Fund (IMF), the World Bank, and the Bank for International Settlements (BIS) to formalise the use of central bank digital currencies (CBDC) in banking systems.

By the end of 2022 the G20 members, the IMF, the World Bank, and the BIS will have completed regulatory stable coin frameworks and research and selection of CBDC designs, technologies, and experiments.

Since the COVID-19 pandemic hit the market earlier this year, the US Federal Reserve has launched a plethora of initiatives to prop up the capital market which was particularly vulnerable to the pandemic, pushing government bond yields to record lows. Thus, this movement has factored in investors’ scramble for higher yield elsewhere, despite lingering risks. Hence, cryptocurrency is emerging as an appealing asset for traders.

According to The Wall Street Journal, although some investors predicted that Bitcoin would eventually upend global finance and replace the US dollar, it has yet to emerge as a mainstream system and is still trading well below its late-2017 peak when it approached $20,000. It has, however, become a verdant field for speculators. Elsewhere, gold headed for the biggest weekly gain in more than three months as investors waited for the US presidential election result.

Meanwhile the chairman of the Fed, Jerome Powell, highlighted that there would be a possible shift in the central bank’s bond purchases in coming months because more fiscal and monetary support is needed as rising COVID-19 infections cloud the outlook for the economic recovery.

Last week, the Bank of England (BoE) announced another dose of bond purchases as officials said they expect the UK economy to shrink in the final quarter of 2020. That followed the Reserve Bank of Australia, which cut its official cash rate to near zero and announced its own debt-buying programme, cited from The Wall Street Journal.

While no surprises are expected from either – with the Fed seen keeping rates at between zero and 0.25 per cent, and the BoE at 0.1 per cent – news conferences held by the central banks’ chiefs could still provide much momentum to both the dollar and gold.

Furthermore, gold will move on the virus-induced data. An alarming worldwide outbreak of new COVID-19 cases has caused a rise in gold prices. Michael Stark, specialist at Exness, emphasised that the most important way to manage risk is to develop the right mindset for trading and investing.

“It’s critical to avoid greed and to act based on realistic goals and expectations. If you jump into a market and throw money around in the hopes of making it big in a few weeks, you’re setting yourself up for failure. This is always true, but it’s particularly the case around now when most markets are still highly volatile,” he said.

“On the other hand, while you do obviously want to buy at lower prices, it’s never a good idea to ‘catch the falling knife’ during a selloff because you can never be completely sure when it’s going to end. Gold, blue chip shares, and major indices historically go up in price over time, so there’s really no need to rush in and buy when you see lower prices. You can enter in the middle of a trend and exit a fair bit before the end but still make a profit,” Stark added.

Luu Huong

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