Bitcoin’s value has briefly topped $US50,000 ($70,000) for the first time in three months, having fallen below $US30,000 just over a month ago, and some analysts say the current rebound might have further to run.
But why has the leading cryptocurrency bounced back so quickly from its recent crash and what could eventually bring the rally undone?
One factor that has been credited for the most recent bounce is PayPal’s announcement that it will this week allow British customers to use its service to buy, hold and sell digital currencies.
It is the first nation outside of the US where the payments giant will offer that service.
Cryptocurrency exchange Coinbase also announced at the end of last week that it would buy $US500 million worth of cryptocurrency and sink 10 per cent of future profits into a cryptocurrency portfolio.
But, perhaps ironically, it appears to be the actions, or more precisely inactions, of central banks that are the key driver of the current rally in Bitcoin and other cryptocurrencies, as well as a raft of other ‘risk’ assets.
For one thing, even though cryptocurrencies are touted by hardcore devotees as ultimate replacements for fiat currencies – those issued by central banks on behalf of governments – for now, at least, cryptocurrencies are generally priced against those fiat currencies, particularly the US dollar.
Last night, the US dollar retreated from recent highs, falling against a range of currencies, including a 1 per cent drop against the Australian dollar, so that mechanically pushes Bitcoin values a bit higher.
Central bank money pushes cryptocurrencies higher
But then there was also the reason that the US dollar dropped.
At the end of last week, a ‘hawkish’ US Federal Reserve committee member Bob Kaplan spoke on Fox Business Network. (Hawkish means that he is generally inclined to remove some of the monetary stimulus and raise interest rates sooner than many other Fed officials and economists believe is appropriate).
Kaplan said he was keeping an open mind about when to start withdrawing stimulus in light of the effect the Delta variant of COVID was having on large parts of the US economy, particularly in the South.
Because of Delta, the Fed has also abandoned its planned in-person annual symposium in Jackson Hole, Wyoming starting on Friday in favour of an online event.
This itself has been seen by many as an acknowledgement by the Fed that we are still far from a post-COVID world.
So, the general expectation is that Fed chairman Jerome Powell won’t explicitly flag pulling the pin on stimulus when he speaks on Friday and, with the punchbowl still on the table for a while longer, investors are keeping the party going for a range of assets.
As Welt financial markets commentator Holger Zachaepitz recently explained through a series of tweets, this central bank largess was associated with price rises across a range of asset classes.
From Bitcoin:
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To shares globally:
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Even to houses (in this case German, but the same low-rate, stimulus forces are at play in Australia and elsewhere):
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Aside from pumping more money into the system that big investors are using to buy assets, central bank actions continue to cause many to fear the debasement (loss of value) of fiat currencies, causing some to turn to cryptocurrencies as one ‘hedge’ against that.
‘New investors needed for fresh record highs’
OANDA’s senior market analyst for the Americas, Edward Moya, said that it was mainly retail investors who started the most recent cryptocurrency price bounce, but big players have also moved in.
“Many institutional investors don’t want to miss out on this current fast appreciation,” he wrote in a note.
“Initially, the capital gains taxation fears were viewed as a negative for the cryptoverse, but that may have just made more traders hodlers.”
However, while Mr Moya does think Bitcoin could move higher still above $US50,000, his explanation for why reveals some similarities between cryptocurrencies and Ponzi schemes, where ever more new investors are needed to pay for the profits of existing ones.
“For Bitcoin to hit fresh record highs, new investor interest needs to continue to grow,” he argued.
“The institutional world should deliver steady inflows as long as the regulator fears ease and on continued progress over transitioning to cleaner energy for mining.
“Bitcoin could be ripe for a fast appreciation here and might not hesitate making a run for $US60,000 if appetite for risky assets remain intact post Jackson Hole.”
Equally, it could again fall in a hole if the Fed surprises, so look out for Jackson town.
