Throughout 2014, financial traders around the world have been enthusiastically taking to bitcoin as a new area for speculation. Analysts, commentators and investors have all ensured that 2014, for investments at least, may well be remembered as the year of the bitcoin.

Throughout 2014, financial traders around the world have been enthusiastically taking to bitcoin as a new area for speculation. Analysts, commentators and investors have all ensured that 2014, for investments at least, may well be remembered as the year of the bitcoin.

There are two main reasons for bitcoin’s rise from a misunderstood market to a home for investors of all kinds. Firstly, its well-known meteoric rise in value. In 2013, a single bitcoin’s value in US dollars rose over 6000%, from around $53 to $681. At one point in the year, it surpassed $1,000 in value. The cryptocurrency’s cost dropped in 2014 and levelled at around the $350-400 mark; a significant loss to those who bought at the beginning of the year, but still a huge gain for earlier investors.

The second reason is contained within that remarkable rise, then drop, for bitcoin. Volatility is hugely enticing for many traders, offering the chance for quick gains (counteracted, of course, by the possibility of quick losses) and short term trading. Traditionally, other markets have provided the best opportunity for risk traders: but in 2014, that picture changed.

Bitcoin’s rise has come with huge swings in value. From February 5 to February 7 this year, the currency lost around $192.72 – or around 24% – in value. For traditional currencies, that is equivalent to the pound losing around 38 cents on the dollar almost overnight.

Bitcoin vs GBP volatility against USD, 1-2 December 2014

Even in periods of extreme volatility, such major swings in established fiat currencies are practically unheard of. And much of 2014 was spent in a period of record calm for forex, further entreating traders to look elsewhere. From May to August, forex volatility was at a 20-year sustained low, as low interest rates from central banks crushed currency movement.

Bitcoin’s similarities to gold have often been noted. Its role in 2014, as a haven for investments when central banks and governments are keeping excitement contained elsewhere provides an interesting counterpoint to the precious metal: so often turned to when markets got too unpredictable in the past. Traders should be wary to the comparison between bitcoin and gold, though. 

Yes, both are in limited supply, outside of the control of most central banks and require some form of ‘mining’ for demand to be met. But two key differences undermine the similarities: gold is not a currency, and gold does not have a uniformly steady production supply.

Bitcoin is, primarily, an alternative online currency, and new merchants accepting Bitcoin are an indication of its use. As such, and in contrast to gold, bitcoin’s relative value is influenced by – and important to – a number of players outside of traditional financial spheres.

There is also no scope for a bitcoin miner to ramp up production in an attempt to price out competitors by driving down the value of bitcoin, as is possible with gold. Instead, bitcoin is released at a steady rate until it reaches the defined maximum of 21 million bitcoins in circulation.

The prospect of restricted money supply causing eventual deflation of bitcoin is perhaps why many traders in bitcoin have been so unwilling to let go of their currency. As Tim Swanson has noted, 70% of bitcoins currently in the public domain have not been traded for over 6 months, as investors hold onto their currency whilst the price is still low. This behaviour is similar to that of many longer term gold investors: keep hold of your assets until they are once again valuable.

That strategy may work for traditional assets, but for bitcoin it could prove disastrous. Quashing liquidity and keeping the price low (by making the currency less attractive), investors who are reluctant to sell coins at a loss are hurting themselves in the short term. And in the longer term, bitcoin’s current performance makes the rise of another cryptocurrency –challengers, including Litecoin and Woodcoin, abound – all the more likely. 

Alongside the quelling of bitcoin’s value from hoarders, risk investors are exacerbating volatility and curtailing any attempts to drive the currency’s value upwards with profit taking. For more established currencies – with central banks factoring in the effects of zealous traders – such behaviours are expected. For fledgling bitcoin, which needs a measure of stability and enhanced liquidity to underline its legitimacy, it can be a real problem.

So what next for Bitcoin? A rise in positive media coverage would be a big boon for the cryptocurrency, particularly if more major retailers can be convinced to take it as payment. In the larger battle of convincing businesses and consumers that bitcoin is legitimate, the problems brought about by financial traders are relatively minor. Pushing the rise of alternative investment methods in bitcoin –spread bets and CFDs that don’t actually see any coin changing hands, for instance – may well go some way to improving the cryptocurrency’s prospects in 2015.

Are financial traders harming bitcoin? is republished with permission from IG.com

Spread bets and CFDs are leveraged products and can result in losses that exceed your deposits. The value of shares, ETFs and ETCs bought through a stockbroking account can fall as well as rise, which could mean getting back less than you originally put in.

This information has been prepared by IG, a trading name of IG Markets Limited. The material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

The post What’s Next for Bitcoin? appeared first on Economy Watch.

In March of this year, forex volatility was about as lifeless across GBP, DXY, EUR and JPY as it had been for the past five years: pretty much matching a low in October 2012.  In April, volatility across those currencies was as low as it had been since before the 2008 crash, matching the record set in May 2007.  July, August, May and June of this year were the four least volatile months for forex since 1994 (see chart, all data from IG’s forex pages). Before this summer, average volatility across those four currencies had only dropped below 4% once in 20 years.

In March of this year, forex volatility was about as lifeless across GBP, DXY, EUR and JPY as it had been for the past five years: pretty much matching a low in October 2012.  In April, volatility across those currencies was as low as it had been since before the 2008 crash, matching the record set in May 2007.  July, August, May and June of this year were the four least volatile months for forex since 1994 (see chart, all data from IG’s forex pages). Before this summer, average volatility across those four currencies had only dropped below 4% once in 20 years. Over the summer, it remained there for four consecutive months.

The true effects of such a sustained drought in forex will probably not be fully known for some time yet.  For now, though, it appears that the rains have come: September saw volatility creep back up above 6%, and October 9%.

EUR/GBP/DXY/JPY average volatility over 20 years.

But it may be premature to declare that life on the markets has fully returned to normal: after all, there was an abnormal amount of activity across indices and equities in October, and forex hit a thoroughly average figure.

The record-low interest rates and policy of quantitative easing employed by major economies (specifically those of the four currencies examined above, though many others have followed suit) has often been blamed for the lack of currency movements. The logic behind such a claim is clear: the low return on cash makes trading forex less enticing to investors. Thus, removing liquidity takes away forex’s single biggest incentive. 

No interest rate rise has come about in the past two months, however, and forex movement has returned. This has also been true for previous periods when interest rates have been suppressed – by the Bank of Japan and Bank of England for several years after the millennium – which, while generally acting as a dampener on forex volatility, were also home to some notable peaks. 

Of course, it is impossible to know whether those peaks would have been accentuated if the UK and Japan had higher interest rates; it does appear, though, that other currencies saw greater movement over the same period.

DXY, EUR, GBP & JPY volatility July 2002 – January 2004. UK currency movement suppressed by low interest rates, but occasionally very liquid.

The returning forex volatility in September and October may not have been caused by an anticipated rate rise, but it could have been caused by the final realisation on the markets that a rate rise was not in fact imminent.

October’s most volatile days were those that came immediately after the International Monetary Fund released a decidedly pessimistic view of global growth, and low inflation made it clear that no central bank would be going near rate rises for some time yet. The long running status quo, where America’s place at the forefront of the race to a rate rise ensured that investors stayed away from other currencies, was broken.

US vs EUR/GBP/JPY currency volatility Aug-Oct 2014. USD liquidity briefly catches up as fears of US strength take hold.

The playing field was abruptly levelled during the week of October 8 and beyond, as the dollar’s stability was eroded and it challenged the average volatility of EUR, GBP and JPY. Since then though, several releases have – once again – changed the game somewhat. 

Stress tests across Europe have sent banks back into the doldrums once more. US QE is about to end. If more hawkish sentiment from the Federal Reserve arrives, combined with good non-farm payrolls and GDP data, a confident US bull market may once again take hold.

Two possible scenarios have become apparent, then. In one, forex volatility is back, part of the re-emergence of risk trading that will come to define this financial year. In the other, a wobble on the long road to recovery changed the picture briefly, and we will soon see currencies settle once again. In part, the choice of which one takes hold is in the hands of traders, central banks and businesses. Either way, more unpredictability is surely on the way in the next few months.

Forex volatility has come back, but for how long? is republished with permission from IG.com

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Despite a point in mid-week when it looked like the dollar might finally be in for a real correction, the dichotomy of economic performance between the US and most of the rest of the world appears to be growing once again.

The notes from the Federal Markets Open Committee on Wednesday caused a real retracement in the dollar across several currencies, the like of which has not been seen in several months. Over the course of an hour, the pound gained 128 pips against the dollar; AUD gained 91 and the yen 52. The euro managed to gain 89 pips in just over 30 minutes.

Despite a point in mid-week when it looked like the dollar might finally be in for a real correction, the dichotomy of economic performance between the US and most of the rest of the world appears to be growing once again.

The notes from the Federal Markets Open Committee on Wednesday caused a real retracement in the dollar across several currencies, the like of which has not been seen in several months. Over the course of an hour, the pound gained 128 pips against the dollar; AUD gained 91 and the yen 52. The euro managed to gain 89 pips in just over 30 minutes.

Underlining the lack of evidence for a rate rise, communicating that any change in policy would not come as a surprise or ahead of schedule, and forecasting weaker US growth thanks in part to the strong dollar had its desired effect: but not for long.

A combination of bad economic news from Germany, hawkish comments from key Federal Reserve committee members that appeared to contravene Janet Yellen’s doctrine, and the continued bullish endeavours of the markets ensured that the dollar started this week in a very similar position to last, as demonstrated by the chart (from IG’s global forex trading system) that shows AUD, GBP and EUR retracing gains made on Wednesday October 8 by Sunday 12..

Indeed, those in Australia, the eurozone or the UK could be forgiven for wondering whether the Fed minutes’ release actually happened and wasn’t dreamt. At 9am on Monday morning, the Australian dollar was just a couple of pips higher than it had been a week before. The pound and euro were both down; only the yen had made a gain against the dollar. The yen’s ability to buck the trend of dollar strength in the past couple of weeks has been remarkable, and possibly due to worries over international conflicts and the continuing horror of the Ebola outbreak.

Unless it becomes unmistakably clear that the US will not be the first major economy to instigate a rate rise, it appears that the dollar will continue to grow in the long term. And the markets seem extremely reluctant to pay heed to any other situation.

Pay heed they should, though. There are several other factors that will affect the markets in a major way come 2015. The long period of low interest rates that will shortly come to an end is unprecedented, and its repercussions will be far and wide.

It also became yet clearer last week that economies over most of the world are currently lagging someway behind the US. In a situation perhaps unthinkable at the beginning of the year, Germany is facing recession once more and desperately needs some positive economic news to improve its outlook. Germany underperforming makes the entire eurozone look even weaker, with Italy, France and Spain all written off as saviours for the region.

Of course, for most that will only push the dollar higher, as it becomes the only currency to benefit from higher interest rates. But there are other sides to the story. The US has been here before, with strong dollar runs in both the 80s and 90s eclipsing its current move. Studies have shown that those runs led to a decrease in manufacturing jobs, which in turn led to a suspicion that other economies were taking American jobs off of the back of weaker currencies. With so many other currencies currently in a position to do just that, allowing the dollar to gain even more strength could be problematic for both the Federal Reserve and Barack Obama.

And it isn’t just the eurozone that’s proving to be weaker than expected in 2014. Growth in key Asian markets has been seen to be slowing markedly faster than expected. Commodity trading is seeing all-time lows for key metals, food and oil. Whilst the dollar’s strength is currently a boon to many central banks, if it becomes completely dominant the story may change, and the US could start facing problems. A rate rise would compound the issue: debt is still very much a part of every country’s balance sheet, so raising rates could have the duel impact of both drastically increasing the value of the dollar and making other countries debt worse.

That picture becomes even starker in emerging economies, where the capital competition that would arise in the US would hugely undermine growth. Any rate rise in the US would cause an exodus of capital from emerging economies, forcing them to undertake drastic measures to keep investors interested. Not only could that exacerbate many of the issues already underlined, it could also have wider political and social implications that the US will be keen to avoid.

The story that was set out for 2014 – where markets blossomed as confidence, strength and capital returned to economies and equities – has so far failed to materialise. To assume that it will in 2015 is dangerously short sighted, especially as there is a raft of political, economic and market-led issues that do not look likely to be resolved anytime soon.

Spread bets and CFDs are leveraged products and can result in losses that exceed your deposits. The value of shares, ETFs and ETCs bought through a stockbroking account can fall as well as rise, which could mean getting back less than you originally put in.

This information has been prepared by IG, a trading name of IG Markets Limited. The material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

The post Looking beyond rate rises as 2015 looms appeared first on Economy Watch.