A Correlation between Bitcoin and Emerging Markets shows the Potential for GrowthAugust 28, 2018
The price of bitcoin is down by 65 percent compared to its highest values in December 2017. However, there is an interesting correlation that has been recently discussed by a bitcoin expert appearing on a major US financial network. The same connection is currently being examined, but if it holds true, it will be a precious insight into one additional cross-market connection that many traders will be interested in.
In fact, the same experts believe that the test of the same link will be happening relatively soon. With it, the bitcoin price stands a chance of moving substantially higher than its previous high point. There are even some who are claiming that the move up to be drastically higher. Naturally, this got many in the crypto ecosystem more than interested both about the theory and its immediate predictions.
Emerging Markets and Bitcoin
The expert who pointed out the connection between bitcoin and the emerging markets is called Thomas Lee. He is of the Fundstrat Global Advisors and according to him, there is an important correlation that is tying up the bitcoin price and the emerging markets.
Mr Lee, speaking to the CNBC, stated that the price of bitcoin is clearly influenced by its fundamental factors like mining potential and the network effect. These drive the prices in either direction, as well as any news or rumors related to them. But, as Mr Lee points out, there are also macro factors that have a direct effect on the network value. He then showed how the MSCI emerging markets index is relative to the S&P as well as the bitcoin price.
According to him, EM rallied in the last quarter of 2017 and at the same time, bitcoin had its huge rally. Since then, EM has fallen greatly and so did the BTC price as well. Mr Lee believes that these two are connected thanks to two factors. The first factor is hedge funds which usually rent stock in emerging markets. For them, the mode of operation goes from high risk to low risk.
In relation to this, bitcoin also suffers when it is a risk-off season, meaning that its price drops. The second reason, however, is the wealth effect. This means for those in the emerging markets who see their stock market fall by a great extent, the end result is having a lot less money to buy bitcoin with.
MSCI and 2018
So, how doe the theory and the two influences stack up against the current year and its cryptocurrency price fluctuations? The MSCI Emerging Markets Index is so far in this year’s down almost 8 percent. This measure is used to assess the equity market performance in global emerging markets. Mr Lee stated that until these emerging markets begin to turn this correlation will continue to hold.
But, he is also very much of a bullish mentality when it comes to the long-term prospect of the bitcoin price. In his view, the possibility of the US Federal Reserve halting its hike rate policy and the dollar weakening would allow both areas to surge in their potential.
Mr Lee is certain that the bitcoin price would follow the same trend in that eventuality. Because of this, he is sure that there is a high chance of the bitcoin market ending up explosively higher than it was the case with the end of 2017.
The Wider Sentiment
Unsurprisingly, the notion like the ones proposed by Mr Lee have little to no traction in many quarters of the financial and even technological domain. Recently, Bill Gates stated for CNBC that he would short bitcoin if he could and bet against it. According to him, it is an asset class that is not producing anything of value and there is no reason why it should go up in price.
This is why he would short it if there was an easy way for him to do this. Other major voices in this community recently stated the same notions with Bill Harris, the former CEO of PayPal calling bitcoin the greatest scam in the entire history.
These concepts sound a bit like former observations of people like Jamie Dimon and other hard-line bitcoin and cryptocurrency critics. However, these have been mostly based in the concepts of having no or little idea of what an actual digital currency based on a blockchain actually is.
Like with eSports and other novel ideas, a lot older experts are struggling with their basic setups and how they fit with the traditional systems. It was easy for most of the blockchain community to reject or ignore those types of attack, but the concept provided by Gates is a lot more sound.
The idea of going forth and shorting bitcoin sounds like a valid option and just shows that the process of cryptocurrencies entering the mainstream has many aspects. These, unfortunately for the developers, traders and investors in crypto, include the previously mentioned alternative.
The Key Reasons for Drops and Hikes
Underneath all of this, there is the problem of no one fully understanding why the price hike of 2017 actually occurred. The same is true for any of the recent drops in value. In 2014, the big drop came as the Mt. Gox exchange had its share of troubles. Fluctuations in BTC prices came in 2015 as the Chinese government dropped the price of yuan, leading many to override the national limits on purchasing of foreign currencies with the cryptocurrency option.
As countless Chinese investors sought a safe haven for their funds in bitcoin and other cryptocurrencies, the price natural rose with the high demand and more purchases. But now, the correlations have become more complex and less clear. Some macroeconomic factors have been rendered irrelevant by the price, while others, as Mr. Lee suggests, are only becoming apparent, but not through a general consensus of the community.
This leaves a lot of room for anyone who wishes to speculate on the nature of the ups and downs – this is to an extent true for all trading and the entire stock market, but they have a clear origin. For bitcoin, in particular, the same cannot be said by any stretch of the imagination.