So far this year, bitcoin has had a great run. Ever since it started recovering from the shock that the split within the bitcoin developer community happened, when Mike Hearn quit the project, the currency has been going up. A number of events helped it rise to where it is now. The halving which is fast approaching, Brexit and even fears over Chinese economic slowdown have had an influence on bitcoin’s valuation this year. However, the price has retreated somewhat from its 2 year high of $771 USD.
Analytical Tools to Analyze Bitcoin’s Behavior
A more detailed analysis of what brought bitcoin back to the $620 – $670 USD range, could be done if it were possible to borrow some theory from the world of Forex. Currency over-shoot is the term used to describe what happens to regular fiat currency, when its value rises rapidly and then comes down a bit, stabilizing somewhat below its peak. The overshooting model states that currency will temporarily overreact to monetary changes in the economy, until prices catch up with the change.
Since bitcoin is not underpinned by traditional monetary tools, like interest rates, the use of this model to explain the fall from peak valuation is not perfect. Still, some elements can be rescued, given that bitcoin exchange for other currencies takes place regularly, and there is a solid amount of economic activity being carried out in bitcoin. This means that peak valuation might be more a function of monetary policy on fiat currencies than on bitcoin itself.
Monetary Changes and Market Reaction
Even if there were not many monetary changes on fiat currencies in the same period that the value of bitcoin increased, there was enough speculation and enough volatility in forex markets, to warrant a reaction on the cryptocurrency side. First and foremost, the Fed debated further measures to restrict monetary policy further during this year. A Fed rate hike, although unlikely now, was the topic of discussion about 2 months ago. Back then, many thought the Fed would hike rates either in June or July. When that expectation wasn’t met, the markets reacted.
Now the bank of Japan is expected to expand its stimulus, creating the expectation for further depreciation of the Japanese Yen. In Britain, the Bank of England expanded the money supply by £3.1 billion, generating more depreciation for another major world currency following Brexit. The price of bitcoin might not respond to this shifts as aggressively as it did a month or so ago, because investors might have already taken these changes into account, and they are already invested in safe haven assets, like bitcoin. Nevertheless the price is responding positively, and there have been more moderate gains in bitcoin valuation over the past few days.
Price Stability for the Time Being
There is no doubt that these monetary shifts and changes in expected exchange rates, have a great influence in forex markets. Bitcoin is part of these markets now. Even though many would rather compare it to gold, bitcoin prices will still be vulnerable to a sudden hike in investments, due to instability and the expectation of devaluation in forex markets. This makes the currency over-shoot model, a possible starting point for forex investors to try and understand how bitcoin will behave. Analysts should be collecting all the data they can now, in order to understand how bitcoin prices will behave in the future, vis-à-vis forex market shocks. For the time being, it seems that the price of bitcoin will advance steadily, with a more moderate upward tendency.
