The web is awash with articles pointing to the fact that economic and political uncertainty, whether it is real or perceived, in places as diverse as China, Greece and Cyprus, has a positive effect on bitcoin prices. With all the collateral damage that the elections in the US have brought onto the Mexican economy – whether real or perceived – it is interesting to compare how the Mexican Peso and bitcoin have been performing over the last month, to encourage further thought about the value of bitcoin as a hedging instrument in this case as well. The average person might face a limited set of options to hedge against the uncertainty that the electoral battle between Trump and Clinton is generating south of the border, and bitcoin could play a role in helping out.
The Mexican Peso and Bitcoin: The last 30 days
Yahoo Finance charts show a very worrying story for Mexican Peso holders, in terms of the currency’s rapid loss of value against the US Dollar over the last 30 days. The peso has had a very sharp decline against the dollar, particularly over the past 2 weeks – the Peso actually appreciated in the days following Trump’s visit to Mexico, before taking a deep dive. Bitcoin has moved in the opposite direction. While not exactly mirroring the plunge the Peso took, bitcoin rose more or less over the same period of time, and then settled at a steady price over the last 10 days.
Is Bitcoin Mature Enough to Provide Stability?
Hindsight is always 20/20, but sometimes it does serve to understand where things might go in the future. So far, bitcoin would not be regarded by disciplined investors as mature enough to provide the kind of stability needed to hedge against fluctuations in traditional currency markets. However, from the data available throughout its short history, bitcoin has shown to be particularly sensitive to tech-related hazards or changes – like perhaps hackers stealing funds or the halving – and somewhat less sensitive to political turmoil. The historical behavior of bitcoin vis-à-vis political and even economic turmoil, could be taken as proof that this cryptocurrency can provide stability when uncertainty generates volatility in the markets. In fact many would claim that bitcoin has been an anchor for people navigating through intense crises like Grexit.
Bitcoin may be able to withstand Political Pressure that the Mexican Peso may not
Taking the Grexit saga as an example of an important economic issue that turned into a political showdown, during which some decided to buy bitcoin to hedge their exposure, the cryptocurrency could be considered as a reasonable hedging instrument simply because it has worked before. The value of bitcoin increased during the Grexit showdown, as it has increased several times before when specific countries or regions faced the risk of economic downturns. This further suggests that bitcoin could be a good asset to invest in when economic hardship or political uncertainty loom. From a purely conceptual perspective, a currency that is not issued by a central bank nor is controlled by any government and travels freely through the internet, is theoretically a great option to consider in order to hedge against political risk. The example of the Mexican Peso over the last 30 days, might also contribute to this view.
Final Thoughts
For Mexicans facing a tough choice between keeping their highly volatile Pesos and buying into a currency such as the US Dollar that will continue to fluctuate even after the presidential election, bitcoin might seem like a plausible option. Bitcoin however, is not immune to the political fallout of the Trump vs Clinton battle, but it is well insulated from it and from other phenomena that might cause aggressive fluctuations in other traditional currencies. Although a lot more study and analysis is needed in order to recommend people buy bitcoin as part of their hedging strategies, some of the data suggest that it should be considered.*
*This is a purely informative article that seeks to stimulate further thought and deeper analysis. Neither the author nor Bitcoin Chaser are in any way or form suggesting anyone should invest in bitcoin or any other asset mentioned, based on the information disclosed. Neither the author nor Bitcoin Chaser are responsible for any investment decisions anyone might make after reading this article.
