Bitcoin has risen by nearly $20k since the beginning of October, and everybody wants to know what the underlying cause is. Investors are once again asking the one fundamental question associated with the cryptocurrency - is it safe to invest in Bitcoin yet?
The rally comes at a very intriguing time given the recently sparked global energy crisis coupled with deteriorating economic data across the world. This begs the question of whether the demand for Bitcoin increases at times when the global economic activity is stymied by one factor or another.
In other words, is the cryptocurrency the emissary of economic uncertainty, or is it rather a safe refuge that investors flee to at times of great market turmoil? It is the age-old "what came first, the chicken or the egg" conundrum, but with an economic twist.
Many cryptocurrency enthusiasts maintain that their interest in Bitcoin arises because it is the world's first decentralised currency, but what does that mean exactly? Plenty of crypto advocates would have you believe that Bitcoin's independence from central banks' oversight means, broadly speaking, that its potential for growth over time is not capped by an overreaching government.
They are not wrong. However, the flip side to this palpable independence from regulatory oversight is the accompanying risk of sudden and substantial crashes of its price. Without oversight, there are no safety nets in place to cushion the fallout when the market frenzy is at its worst. But why worry as long as everything goes right?
In reality, it is not the predicated freedom of Bitcoin that represents its biggest determinant of demand; it is uncertainty. The enormous potential of Bitcoin inevitably reaches maximum appeal at times when economic uncertainty and tribulations are also at their highest. The decentralised nature of the cryptocurrency manifests itself as an escape from all of the chaos that embroils the global economy at times of considerable market downturns.
After all, if the system goes down despite the governmental oversight put in place, it only makes sense to flee to the one asset that is bereft of such limitations.
The price chart above is populated with important economic numbers that were released since April (all of these have been covered by our market updates) contrasted against Bitcoin's price action, which had reached a fresh peak at around 64000.00 by mid-April. The subsequent downtrend, which bottomed out around the psychological support level at 30000.00, evolved parallel to the accelerating global recovery.
Among other things, this period saw the biggest quarterly GDP expansion of the Chinese economy on record, the strongest U.S. factory activity on record and a twofold increase in U.S. consumer prices, all markers of a robust recovery. Meanwhile, the pullbacks within the downtrend roughly coincided with the publication of weaker-than-expected numbers, such as disappointing U.S. payrolls and deteriorating German economic sentiment.
Bitcoin's following uptrend commenced in mid-July. It was marked by a sizable decrease in U.S. economic output and employment growth and tumbling investors' confidence and factory activity in Germany. The slowing global recovery at that time seemed to catalyse renewed interest in Bitcoin, which was only temporarily suspended throughout September.
The angle of the uptrend became even steeper in early October, just as the global energy crisis deepened. Bitcoin's accelerating rally at a time when the general market uncertainty was rising just as rapidly is clearly evocative of an existing market dynamic. The murkier that the global recovery prospects get, the more desirable that the cryptocurrency becomes.
The inverse relationship between Bitcoin's price action and the various economic cycles is crystalised on the daily chart below. Given what we know about the tendency of the cryptocurrency to appreciate in value as the underlying economic uncertainty grows, it can be assumed that as the global energy crisis settles down, Bitcoin's rally may get reversed. If this does pan out, the inverse relationship of the two would be confirmed.
In the short term, this divergence can be beneficial to speculators and investors seeking to hedge their portfolios against mounting uncertainty in the market or squeeze some quick profits on the underlying volatility. Yet, in the longer term, this inverse relationship between the two raises even more profound questions regarding Bitcoin's supposed future role as a substitute for fiat currency.
Despite its relative independence from governmental oversight, which could be detrimental when the price of Bitcoin is in freefall, the cryptocurrency cannot realistically become the primary medium of exchange in a global economy that continues to be typified by successive cycles of expansion and contraction. A paradigm change in investors' perceptions of Bitcoin's potential is needed for that.
In order for Bitcoin to truly become the flagship of sustainable progress, traders and investors should be able to see its potential at times when economic activity is improving, instead of using it broadly to tap into the speculative bubbles that inevitably arise whenever activity is faltering. The fact that presently, the price of Bitcoin seems to rally the most at times when economic uncertainty grows implies that the majority of market participants continue to be most interested in its shorter-term speculative nature.