Bitcoin, the cryptocurrency built on blockchain technology, is fast becoming a major player in the currency market. Since the beginning of 2017, the value of “XBT” has rocketed by over 150% and the simplistic reason for this would be that there is more demand than there is supply. Vinay Sharma, Senior Trader at ayondo markets tells Finance Monthly more about the current state of the bitcoin and its future prospects below.
Bitcoin uses encryption techniques to regulate the generation of its units and verify the transfer of its funds. It essentially allows people to cut out middlemen and thanks to its supposed security and independence from nations and central banks, its value, along with that of other cryptocurrencies, such as Ethereum and Ripple, has soared in recent months. In the Middle East, Africa, South America and Eastern Europe, for example, concerns over the volatile governments or consistent long-term currency inflation have contributed to Bitcoin's rising valuation.
When you look at Bitcoin’s rise in the last seven years, the mind boggles. An investor who had bought 1,000USD of the cryptocurrency in 2010, would now own around 45millionUSD worth[1]. The question many people are now asking is: is its value increasing due to mere speculation, or is it actually becoming a more widely accepted form of money? The currency is now available to many traders and investors to trade as a standard forex product. At ayondo, for example, we recently added Bitcoin to our product portfolio, meaning clients can now trade on its anticipated price movements without having to actually open up an e-wallet to purchase it on the internet.
While Trading Bitcoin does open it up to speculation, the cryptocurrency is also being accepted more widely as a medium of exchange, which after all, is the purpose of money in the first place. The number of businesses accepting Bitcoin is rapidly increasing, with the likes of Expedia, Etsy, Microsoft and Dell, to name a few, all accepting it as a form of payment, although it’s fair to say the UK is lagging behind in its Bitcoin acceptance.
So what’s next for Bitcoin? At the time of writing, its value is 2,735USD and one thing I am pretty confident of is that volatility lies ahead. Last week, for example, Morgan Stanley released a note saying that it doesn’t believe Bitcoin will be a viable currency in the future, and its value subsequently fell 20%. However, it has since recovered those losses, and whilst I largely agree with Morgan Stanley’s analysis, it certainly offers plenty of upside potential as a trading instrument, as demand in the short to medium term is more than likely to outstrip supply. Whether it will in fact become a viable medium of exchange in the future remains to be seen, but what’s undeniable, is that current interest is immense and its high variation in price offers an excellent trading opportunity.
[1] http://www.marketwatch.com/story/as-bitcoin-rockets-to-records-heres-how-much-skeptics-missed-out-on-says-one-money-manager-2017-05-22
At the current rate of fluctuation, with socio-political uncertainty reeking chaos in the markets, the pound’s performance leaves little to desire. Currency experts are now warning that further in 2017 we could see the pound hitting the same value as the euro.
According to the Sun, analysts have advised towards this possible plunge due to the general election, which resulted in a hung parliament, and the closing on the Brexit deadline.
Holidaymakers that are worried about the potential currency volatility ahead are being told to buy half their currency now and half closer to their break, as the pound could even break below the euro.
Finance Monthly has heard Your Thoughts on the possibility of a British value parity with the euro and included a few of your comments below.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
The prospect of the GBP/EUR exchange rate reaching parity or 1 GBP = 1 EUR has been raised many times over the course of recent events, before and after the Referendum vote. Throughout 2017 analysts have been split as to which direction rates will take, I believe there are two key features which explain why we are here and which will ultimately shape the likelihood of it being achieved.
Parity was almost reached in December 2008 when GBP/EUR hit 1.0227, since then the July 2015 high of 1.4345 had seemed to indicate such lower levels were confined to history. However, since 2016 and the result of the EU Referendum, politics has become the big driver on Sterling. Political concerns too have reached Europe and the failure of Le Pen and Gert Wilders to win any victory has seen the Euro strengthen. There is a German election in September and potentially an Italian vote too to be called in September, but, for now it seems the Euro has survived and this has helped it gain against the politically scarred Pound.
Economic data is the second factor and here too we see the Eurozone outshining the UK growing 0.5% in Q1 2017 against the 0.2% for the UK. Divergence in monetary policy is also key as the UK and the Bank of England could potentially raise interest rates to combat rising Inflation, threatening consumer spending and lowering GDP. Meanwhile the European Central Bank are looking to withdraw stimulus and maybe raise interest rates in the future, helping to further boost the positive sentiments towards the Euro.
Ultimately the prospect of parity is not going away and the outcome of the UK election is vital to determining how likely, as it effects who is on the UK side of negotiations with the EU and how strong their mandate is.
We are only 2 months into the Article 50 window and just coming up to the one year anniversary of the vote on the 23rd June. We have in the grand scheme of history just begun on this path and looking at what is ahead the prospect of parity for GBP/EUR this year remains a very real possibility.
Owain Walters, CEO, Frontierpay:
Ahead of the election, some analysts warned that the value of sterling will reach just £1 to €1. The political uncertainty following the election hasn’t eased the short-term risks to the Pound. However, I would argue that this result will, in the long term, be good news for sterling.
What I believe we will see next, as the Conservatives are forced to form a coalition with the DUP, is that Theresa May’s plan for a ‘hard Brexit’ will be diluted, if not taken off the table entirely. Since the vote to leave the European Union last year, the currency market has, on the whole, not responded well to the dialogue around a “Hard Brexit” and with the influence of a more liberal party in a new coalition government, the idea of a ‘softer’ Brexit will provide support to the Pound and we will see a period of strength.
The significant losses that the SNP has seen will also reduce the chances of a second Scottish independence referendum. While the notion of another Scottish referendum hasn’t done irreparable damage to the pound, taking it off the table at least for the foreseeable future will certainly give the Pound an extra boost.
Patrick Leahy, CFO, JML:
If the political events of the last two years have shown us anything, it is that situations that are improbable are certainly not impossible. Sterling/euro – or even sterling/dollar – parity is not out of the question. Whether you are an importer or exporter of goods or currency, CFOs across the country would rather the whole thing settled down and we had some certainty; but that’s unlikely. So what can you do?
Being in the FMCG market, JML’s short-term retail price is fixed, and it takes a good year to adjust prices. Just look at the large drop in sterling, post Brexit; it is only now that the inflation effect is really starting to trickle through to business and consumers. So, as a CFO with no concrete forecast on what will happen with the rates, you must try to minimise the impact any movement has on your pricing and margin strategy.
As a net importer, UK businesses and especially retailers are always susceptible to falls in rate, pushing up our costs, reducing margins, or lowering volumes. In some ways, the best strategy any business can have to manage exchange risks is to sell to other parts of the world – it’s a natural hedge. But, it is not that simple, because margins in each country are important and you can’t always point to your exchange gains when discussing gross profits with your invoice discount provider.
For retailers, the key is to not overstretch yourself if hedging on currency movement. Regularly and accurately forecasting your business performance is key to achieving this. It’s impossible to know exactly what your currency requirements are in 12 months’ time, but you know you will have some. You might win and lose on currency movements along the way but by slowly building your hedged positions you will have minimised the risks and helped the business achieve its margin along the way.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Swiss National Bank headquarters
The Swiss National Bank (SNB) put European financial markets in a spin yesterday when it announced it would no longer be pegging its currency, the Swiss Franc, to the euro. SNB is discontinuing the minimum exchange rate of CHF 1.20 per euro.
The banking institution said that it was taking the step to counteract devaluation of its currency. The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” the bank said in a statement.
FX expert Philippe Gelis, CEO and co-founder Kantox believes the Swiss National Bank’s decision to abandon its currency ceiling yesterday could prove as a precursor to countries leaving the euro altogether.
“Of course Switzerland is not a member of the euro, but the SNB’s decision yesterday to remove the enforced ceiling of CHF1.20 per euro essentially demonstrated the tax haven country’s complete loss of faith in the currency that it has been pegged to for the last three years,” said Mr. Gelis.
“The main reason for the SNB’s decision is that in order to maintain a low Swiss franc against the euro, the SNB had to sell its franc reserves and buy euros. This led to large increases on the euro reserves they held. In other words, as any private individual might have done, the SNB decided to take its loss on the EUR and quit the game.”
According to Mr. Gelis, the euro could be hitting troubled waters in 2015, especially if the EU considers adopting a programme of quantitative easing (QE). “QE would see investors flee from the euro to park their money somewhere safer. It is seen by many as the last throw of the dice to rescue the Eurozone, by a central bank bereft of ideas,” he said.
“Added to this, the euro faces Greek and Spanish elections this year, whose results may well see far-left, anti-austerity parties assume power. The Spanish political establishment and the European Union will nervously look to the Greek election later this month as an indicator of what may come for Spain at the end of the year.”
