Patrick Foot is a writer on financial markets at IG, a leading provider of online trading. In this article he examines what the current lack of volatility in the forex markets means for traders of digital currencies like bitcoin.
The last 12 months have been barren for forex investors hoping for some currency movements they can base trading strategies on.
Volatility has dwindled from healthy levels in mid-2013 down to 25-year lows in May and July this year.
Several reasons have been put forward for what may be the cause of this dry spell, but the overriding causes appear to be the continually low interest rates set by central banks, increased geopolitical risk and return to growth from major economies (keeping risk low in other assets).
Bitcoin’s nature sets it apart from such outside factors as these. A lack of a central regulator (or base in a national bank) keeps bitcoin separate from interest rate movements and economic recovery. The escalation of tension between any of Russia, America, Israel or the Middle East is unlikely to play out in bitcoin markets.
That has resulted in bitcoin enjoying a starkly different 12 months to more traditional currencies, experiencing a swing worth of over $1,000 before levelling out at somewhere around the $550-$650 mark for the past few months – a comparative drop in volatility, but still unstable when compared to other currencies and markets.
As such, the major movements tend to be associated with major developments in the currency itself. Bitcoin’s growth at the end of 2013 was largely down to a Senate committee ruling on its legitimacy, and dwindling in February around the disastrous fall of Mt Gox.
However, there are several ways in which the lull in forex volatility and boom in bitcoin can be related. Its position outside political and economic influence certainly makes bitcoin attractive to those driven away by low interest rates in the US, UK, EU and other major economies. In that respect, bitcoin could be seen as a high-volatility commodity: useful to traders in times of low market movement elsewhere.
Until some of the oft-noted fears surrounding bitcoin’s legitimacy and stability are answered, price fluctuations will be hard to predict to all but the most insightful of traders. The longer the current situation continues, however, the better for bitcoin.
Traders are being forced to diversify their portfolios and risk appetites are growing as economies recover without liquid forex markets to accompany them. At the moment, the bullish sentiment in several major indices is taking the majority of investor attention and bearish news on bitcoin continues to dissuade those looking for a forex alternative.
But the outlook for both of those assets could reverse entirely at any moment. An index correction has been predicted for some time; bitcoin could be one positive development away from another major move. Should that happen, the lull in forex volatility could start playing out in bitcoin in a major way.
Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.
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