Cryptocurrencies are behaving more like gold as volatility eases: Here’s why
UAE crypto traders explain why price of Bitcoin, Ether and others seem to be flatlining
Dubai: Cryptocurrencies have been consistently exhibiting an uncharacteristic lack of volatility, and such a stability in prices have come amid the top crypto Bitcoin’s increasing correlation with gold prices.
“The largest cryptocurrency has been largely flitting between the $19,000 (Dh70,000) and $20,000 (Dh73,500) price levels since the start of September – a remarkable stabilisation for Bitcoin, which was once synonymous volatility,” said Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“The macro picture has become increasingly important for Bitcoin this year. Whenever some market momentum seems to fade, stocks and cryptocurrencies alike are mostly holding onto those gains – making them an even better-than-usual investment.”
Red-hot inflation this year has pushed central banks worldwide to aggressively tighten financial conditions, raising interest rates and, in turn, increasing the prospect of recession. This gloomy macro-outlook has contributed to crypto trading in correlation with other risk-sensitive assets like stocks.
Whenever some market momentum seems to fade, stocks and cryptocurrencies alike are mostly holding onto those gains – making them an even better-than-usual investment
Bitcoin volatility subsides considerably
Bitcoin has been off its all-time high from nearly a year ago by more than 70 per cent, and analysts have been looking for the crypto to break lower – to retest its June lows of about $17,000 (Dh36,731) and find a new bottom, potentially as low as $10,000 (Dh36,731) – if it fails to hold at $19,000 (Dh69,788).
Bitcoin hit multiple new all-time high prices in 2021 — followed by big drops — and more major companies have bought in. Ethereum, the second-biggest cryptocurrency, notched its own new all-time high late last year as well, and then crashed below $900 (Dh3,305) in June, its lowest level since 2021.
“The first half of 2022 has been very bad for the crypto market. Bitcoin and Ethereum are down more than 50 per cent from their all-time highs in late 2021. While there have been small surges in recent weeks, the crypto market is largely stalled,” added Deshell.
“All the while, people’s interest in crypto remains high: it’s a hot topic not only among investors but in popular culture too, thanks to everyone from long-standing investors or cryptocurrency protagonists like billionaire Elon Musk, who has been advocating in favour of the widely-accepted digital asset.”
More global acceptance aids recovery
Mainstream companies across multiple industries have been taking interest worldwide — and in some cases themselves invested in — cryptocurrency and blockchain in 2021, and even more so in 2022.
Global financial technology companies are also betting on crypto by allowing users to buy on their platforms, while also accepting payments made in Bitcoin – and experts predict more and more of this buy-in – and prices stabilising further as a result.
“While paying for things in cryptocurrencies doesn’t make sense for most people right now, more global retailers accepting payments might change that landscape in the near future,” added Deshell.
“We’re likely still a long way off before it’ll be a smart financial decision to spend Bitcoin on goods or services, but further institutional adoption could bring about more use-cases for everyday users, and in turn, have an impact on crypto prices.
“Nothing is guaranteed, but if you buy cryptocurrency as a long-term store of value, the more 'real world' uses it has, the more likely demand and value will increase.”
We’re likely still a long way off before it’ll be a smart financial decision to spend Bitcoin on goods or services, but further institutional adoption could bring about more use-cases for everyday users
How recent currency volatility affects cryptocurrencies
One of September’s biggest market catalysts was the nosedive of the British pound. While an aggressive new economic stimulus program in the UK, which included tax cuts and investment incentives, precipitated a market sell-off, a quick turnaround in policy stance hastened a rapid market recovery.
After the pound fell to record lows against the US dollar, the central bank had to intervene and stem losses with drastic measures to keep government coffers from depleting too quickly. But how does such volatility in key global currencies affect cryptocurrency prices?
“Uncertainty and volatility in ‘fiat’ currencies may end up helping the crypto market in the long term. There was earlier a lack of confidence among investors with how the market reacted on volatile currency moves,” said Brody Dunn, an investment manager at a UAE-based asset advisory firm.
Well-known examples of fiat currencies include the pound sterling, the euro, and the US dollar. In fact, very few world currencies are true commodity currencies, and most are, in one way or another, a form of fiat money.
Bitcoin is not a fiat currency since it's not a legal tender issued by the government. Bitcoin is a cryptocurrency backed by blockchain technology and free of a central authority.
“This raises the notion that crypto can provide a solution to this mess, a way out of depending on a small selection of individuals to provide economic stability.
“But unfortunately for crypto investors, the recent US dollar strength suggests investors are more worried about a potential global economic downturn, and they still see the greenback as the safest.”
Cryptocurrency regulations are coming faster than ever
With demand and potential acceptance seemingly at its peak, crypto regulations are fast approaching to not only get ahead of the game, but also to protect investors from potential future losses.
“After the catastrophic crashes that have unfolded in the crypto market recently, it is clear that stringent regulation could arrive soon,” added Dunn, who has also been trading crypto since 2010.
While several central banks worldwide have hinted at having no intention of banning cryptocurrency, there are different agencies that may or may not have jurisdiction to oversee everything.”
Clear regulation would mean the removal of a major roadblock for cryptocurrency, analysts reiterate, since investors largely are operating without clear guidelines now. So, while crypto regulation can be a hot button topic, plenty of experts say it’s a good thing for investors and the industry.
“More regulation could mean more stability in a notoriously volatile crypto market. It also has the potential to protect long-term investors, prevent fraudulent activity in the space, and provide clear guidance to allow companies to innovate — if it strikes the right balance,” explained Dunn.
“While regulatory announcements can also positively affect the price stability of cryptocurrency in already volatile markets, market volatility is why we recommend keeping any crypto investments to less than 5 per cent of your total portfolio and never investing anything you’re not OK with losing.”
In October 2019, the SCA published the draft crypto asset regulation for review and comments of the stakeholders. A year later in December 2020, a decision concerning Crypto Assets Activities Regulation (Regulation) was published.
Now for the first time in the UAE, the regulators have set out the regulatory parameters within which a crypto-asset exchange for trading can be licensed and operate, particularly when it comes to offering crypto assets and tokens and running crypto fundraising platforms in the mainland.