Is Monetary Policy Supporting Bitcoin?

Thursday’s euphoria in the cryptomarkets shifted to profit taking on Friday, with Bitcoin Cash, Litecoin and Ripple all seeing red, while Bitcoin temporarily broke free of $16,000 levels before falling back to 16,720 at the time of writing, a 1.92% gain for the day.

The cryptomarkets look to be in a temporary rut with Bitcoin Cash leading the declines, down 11.63% to $1,711.4. Ripple managed to recover from heavier losses earlier in the day, to bounce back to $0.7936 at the time of writing, suggesting that, while this week’s success took its toll, further upside is on the horizon.

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While the week has been a relatively uneventful one for Bitcoin, the general sentiment towards Bitcoin and its peers is a positive one, with few suggesting that there will be any kind of a correction next year.

While the entire ethos of Bitcoin and cryptocurrencies is independence from central banks and governments, the most recent monetary policy decision by the FED, the ECB and the BoE continue to support low funding costs through next year.

The FED may not have a direct influence on Bitcoin and its peers, but one does wonder whether the low interest environment is a key contributor to the ever increasing market caps and price gains seen through the year.

We are some way off seeing interest rates in key geographies reach levels that could slowdown capital flows into the cryptocurrencies, but it would certainly be interesting to see how the cryptomarkets would fare in a pre-global financial crisis interest rate environment.

Looking at the more mature asset classes and the returns on offer, one would hazard a guess that Bitcoin and the rest would be more resilient to a rising interest rate environment than the more mature markets. The returns on offer have been far more significant and, assuming that the bubble doesn’t burst anytime soon, will likely to continue to offer impressive returns through next year.

Taking a look at the Dow Jones Industrial Average’s year-to-date return of 24.02%, Bitcoin investors would have been somewhat disappointed with such a woeful return over the same period. The fact that the Dow is knocking on the door of 25,000 and has made just 24% must have an impact on investor sentiment towards the asset classes and see an increase in appetite for the likes of Bitcoin. The hype around the equity markets has been tremendous, but the returns pale into insignificance when compared with the cryptocurrencies.

Even if prospective investors are of the view that Bitcoin is a little toppy, the vast number of cryptocurrencies on offer and the upcoming initial coin offerings provide ample investment opportunity and even the most sceptical investor will have to eventual pay some attention to the cryptomarkets.

For now, institutional money continues to be biased towards the more established equity markets, but with ETFs and fund managers looking to get on the Bitcoin bandwagon, one does wonder how long it will take before the more traditional long-only funds begin to explore Bitcoin and other cryptocurrencies as an asset class to invest in. Fund mandates would need to be amended to permit such exposures, but if the mainstream wants to keep up with the cryptomarket phenomenon, asset managers will need to provide investors with an alternative to direct investment.

The launch of Bitcoin futures is likely to be the first in a series of steps to broaden the ways in which investors can gain exposure to the likes of Bitcoin. Once the ETFs and Bitcoin funds are up and running, it’s unlikely to be too long before the the more well known managers of this world follow suit, in spite of calling Bitcoin a bubble today.

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