In many respects, the dawn of the “roaring 2020s” has begun on a rather precarious note.
The UK is preparing to go through with the exit from the European Union that it has been planning for two years at the end of this month; in the United States, President Donald Trump is embroiled in an impeachment trial — and in spite of the fact that most analysts seem to agree that Trump won’t be removed from office, the polarization of the political scene in the US has been described as unprecedented.
Elsewhere in the world, protests are still raging in Hong Kong, India, and Iraq; economic crises continue to unfold in various places around the globe, and predictions of a global economic meltdown have haunted political discussions and media headlines for months.
Hong Kong is going to be a big driver of #crypto prices. With the political unrest and weakening domestic economy, along with a potential failure of the USDHKD peg, all of these events will drive people in Hong Kong into #crypto. Regulating ICOs is also a step in right direction https://t.co/D7z0bGCetC
— Intuit Φ Consultants (@Intuit_Trading) October 5, 2019
The ways in which political unrest can affect the financial world can be difficult to quantify — however, the interconnected nature of politics, government, and finance tells a tale of deep interdependence. As we step into the New Year, it’s important to consider how the current state of affairs and the knowable, nearly-knowable, and unknowable events that will come to pass will affect world economies and investment portfolios.
Additionally, the political upheaval and change that is currently taking place in much of the world seems to have interesting effects on cryptocurrency markets. Because Bitcoin and cryptocurrency more generally are just over ten years old, the ways in which political events affect crypto have not been as closely studied as the effects on more traditional assets and financial markets have been studied.
However, as crypto hodlers enter into 2020, analysts are attempting to place crypto into a broader historical context, and to attempt to make sense of what may occur in crypto as a result of the political trials, changes–expected and unexpected–that lie ahead.
How could major political changes and upheaval affect cryptocurrency markets over the course of the next year and beyond?
Depending on where you live, BTC and other cryptocurrencies are either risk-on or risk-off assets
Bitcoin’s connection to political upheaval has much to do with its circumstantial status as a so-called “safe-haven” asset, or an asset that can be used as a safe place to store value when another asset–for example, a nation’s fiat currency–is rapidly losing value.
For most people in the developed world, Bitcoin and other cryptocurrencies are anything but — the volatility of crypto is notorious. However, in countries that are experiencing economic crises (for example, Venezuela and Zimbabwe), BTC has been noted as a popular option for protecting savings: easily accessible, easy to store, and easy to sell.
Sukhi Jutla, co-founder and chief operating officer of blockchain-based gold jewelry platform MarketOrders, explained to Finance Magnates that “political unrest generally demonstrates a loss in confidence in the governing authorities in a country. Governments are closely tied to the financial systems in place so this has a knock-on effect on the financial landscape in a negative way.”
”At no point in history have you ever heard of someone needing a wheelbarrow full of gold to buy a loaf of bread. The same can’t be said for collapsing currency.”
“Political unrest tends to undermine the current financial systems in place and this is where you also tend to see the value of home currenc[ies] plummeting,” Jutla continued. “It is in these conditions that crypto prices tend to increase as investors move assets to find [assets] that are not controlled or influenced by one party.”
And what could these assets be? Monica Eaton-Cardone, Forbes Technology Council member, fintech expert, and chief operating officer of international cybersecurity firm Chargebacks911, also pointed out to Finance Magnates that “historically, alternative currencies rise in popularity when countries enter periods of chaos, conflict and uncertainty.”
The rise in Korean vs. US tensions could also play a role? The expectation of war/political unrest has historically led to investment/monetary protectionism – crypto could be an appealing safe haven for consumers. Re: https://t.co/FdRJOdooUW
— Eva Beylin (@evabeylin) December 6, 2017
“Gold, precious metals and rare jewels are some of the traditional ways for investors to hedge their bets, diversify, and not be solely reliant on national currency,” Eaton-Cardone said.
“Additionally, if you were an immigrant fleeing from a dangerous area, diamonds and gold coins were easily portable and always maintained at least some value,” she continued. “At no point in history have you ever heard of someone needing a wheelbarrow full of gold to buy a loaf of bread. The same can’t be said for collapsing currency.”
“Cryptocurrency is gold for the technology class.”
As an easily-portable and generally valuable asset, therefore, “cryptocurrency is gold for the technology class,” Eaton-Cardone explained. “It’s even more portable than diamonds or coins, and for many investors, it’s a very attractive way to diversify.”
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“I also think there’s an emotional component,” she added. “The idea of hoarding piles of gold sounds miserly and antiquated, but there’s something exciting about investing in technology.”
However, in addition to being a newer asset, Bitcoin and other cryptocurrencies don’t have the same cultural significance and practical usefulness that gold and jewels have: “critics point out that gold, diamonds and precious metals have always had intrinsic worth beyond the purely monetary: rare earth metals are increasingly being used in our hi-tech devices, beautiful jewelry has always been highly valued, gold is one of our most malleable, useful metals, and the hardness of diamonds has vast mechanical utility.”
“By contrast, cryptocurrency might help diversify your portfolio, but that’s where its diversity ends. It’s not like gold or diamonds. Cryptocurrency is what it is, and it can’t really be more than that. It’s more like an idea, and less like a physical object.”
Our emotions could dictate the value of crypto in the wake of political changes
But the differences between cryptocurrency as a sort of “digital gold” and real, actual physical goal may not be so significant in terms of the effects that major political events may have on them.
For example, Eaton-Cardone said that when it comes to both Brexit and the possible (though unlikely) impeachment of the US president, both events “could lead to a major spike in gold prices,” and therefore “could also fuel a rise in cryptocurrency.”
However, “it will depend on how we emotionally respond to these events.”
“Are people optimistic and hopeful about Brexit? Are we confident that the American political apparatus can withstand the impeachment process, with minimal turbulence?”, Eaton-Cardone asked. And is there a good chance we’ll ultimately end up in a better place? Or, are these events harbingers of even greater chaos and fiercer conflict, and a frightening omen of how much faith we’ve lost in national institutions?”
“The viability of cryptocurrency will depend, at least partially, on which sentiment wins out — optimism or pessimism.”
Sukhi Jutla added that although Brexit is now a certainty with a specified date, markets could still respond frantically: “wven though we know when Brexit will happen, we will continue to see erratic behavior across the money markets and this will also include the value of the pound,” she told Finance Magnates.
“In this case, I predict there will a flurry of activity in the gold and Bitcoin markets, driving both of these assets market prices upwards. In times of chaos and uncertainty, we think we do the most logical and rational things, but all we do is panic in the face of fear and this will cause the price of the pound to plummet.”
”Uncertainty and lack of confidence” could drive the flight of capital from struggling economies and into crypto — but the exact effects are difficult to measure
Even if the effects of Brexit and the impeachment drama–which are both taking place in countries with relatively stable national economies and currencies–are not significantly reflected in cryptocurrency markets, international investigator and due diligence expert L. Burke Files pointed out to Finance Magnates that the possible use of cryptocurrency as a tool for capital flight from countries with smaller, less stable economies could have a noticeable impact on the price of crypto.
“Look to what is going to happen in Iran, Venezuela, Vietnam, Lebanon, Indonesia, Turkey, Nigeria, Egypt, [and] Kenya,” Files said. Because all of these countries have been stricken with “various forms of instability and troubled economies,” the average person has faced difficulties “getting their money out of the countries or converting the money to EUR or USD,” as they may attempt to do if a national currency is failing.
“Demand from any one of these countries could out significant upward pressure on the value of a cryptocurrency,” Files explained.
One specific, parallel example of this that Files pointed to took place in Kenya over a decade ago: during the post-election violence in the country that took place just over a decade ago, “many people dumped their back accounts and loaded their savings onto the M-Pesa platform,” a mobile money and payments platform that was launched in 2007. “Much of it never came back to banks,” Files said.
Ultimately, political unrest “is just one of many supply and demand variables that impact the price of cryptocurrencies”
Indeed, “uncertainty and lack of confidence” drive the flight of capital from a struggling economy, he continued. In situations where national currency is losing its value, “people [are] willing to take a very large loss for the certainty of the value of the USD.”
“I believe the only reason you have not seen more flight capital come to cryptocurrencies is the extreme volatility of the value of cryptocurrencies married to the difficulty of using cryptocurrencies,” Files said, as opposed to other methods of securing the value of savings and investments.
But while digital platforms like M-Pesa may take savings out of banks, which can be more vulnerable at times of political unrest, they don’t convert currency into another currency or asset that could prove to be more stable in a longer-term sense.
And indeed, political unrest, “social unrest, economic problems, and generally corrupt government[s] drive away wealth,” Files said. “The wealth will escape any way it can. It will be wired out, trucked out, or (as I saw in Zimbabwe) stashed in spare tires and driven across the border. The fleeing money is called flight capital.”
“[…] Crypto is just one of many ways flight capital can leave a country[‘s economy]. Does it affect the price? I am sure it does,” Files said. However, ultimately, “it is just one of many supply and demand variables that impact the price of cryptocurrencies.”
The general public doesn’t jump to bitcoin even if there are political or economical unrest just yet contrary to the narrative crypto/mainstream media want us to believe. This will take more time but when it happens, it’ll probably so obvious, it’s not even a story anymore.
— Koji Higashi (@Coin_and_Peace) October 7, 2019