To understand Bitcoin’s role in the first half of 2013, one must understand the macro trends driving its recent more widespread adoption. From Capital Controls to Currency Wars and Monetary Easing, the 'freedom' offered by Bitcoin has garnered a great deal of attention as these topics have recently re-emerged to the forefront of global attention. The following in-depth review (and outlook) of the Bitcoin environment covers trading, exchanges, venture capital, mining, and regulatory developments of the crypto-currency. The past six months may one day prove to be among the most important in bitcoin’s history. As global events sparked increasing need for frictionless wealth transfers, Bitcoin’s popularity ballooned and ignited a conversation that will likely continue to flourish in the years to come.
Via The Genesis Block,
Bitcoin As An Asset Class...
Bitcoin has a long road ahead towards finding its place in the global macro environment. Yet, despite the fact that it remains a relatively immature asset class still subject to volatility, bubbles, and occasional manipulation, some correlations with other major financial assets are beginning to take shape.
As the first potentially viable, non-centrally issued currency, we were surprised to see a remarkably high correlation between BTC and the USD in June. As we noted at the time, bitcoin seemed to spend most of 2Q13 making gains during risk-off periods, serving as an alternative for those averse to the USD’s susceptibility to inflationary central policy, despite its significant volatility.
That correlation flipped a full 180 degrees immediately after Ben Bernanke signaled that the Fed may begin to taper its $85 billion per month asset purchases on June 20. From May 1 until that date, BTC and USD shared a 0.76 correlation. That correlation has since shifted to become almost completely inverse at -0.88 through mid-July.
As a small market, bitcoin is still heavily influenced by individual micro events, but traders are clearly paying attention to major macro headlines as well.
We expect micro news, particularly at exchanges, to continue to weigh heavily on market prices. With the tremendous infrastructure set to roll out during the remainder of the year, that trend will likely shift towards bitcoin maturing into a more defined role in the global financial environment, as we’ve seen start to develop over the past few weeks.
In particular, the trend of moving inversely with USD is likely to continue. Further discussions of Fed tapering, for example, should continue to put downward pressure on bitcoin prices. That inverse correlation remains subject to breaking on bitcoin-related macro news. One such scenario would be another Cyprus-like event where financial markets panic and rush to the safe-haven USD, while adoption for bitcoin as a means of subverting capital controls drives up BTC/USD rates simultaneously.
In particular, we are watching Greece, who has been consistently unable to meet debt reduction targets and remains at the whim of the ECB for continued solvency. We are also watching Italy, who was recently downgraded by S&P to BBB as their unemployment rate climbs above 12%. Similarly, Portugal’s debt-to-GDP ratio has climbed from 108% to 124% already in 2013. The stipulations around a bailout for any of these countries may lead to a jump in bitcoin adoption amid financial unrest of the citizenry.
The Genesis Block's 2013 Mid-Year Botcoin Review And Outlook,