The forex market has always been an incredibly volatile financial space, with this reputation having gained further traction since the evolution of cryptocurrency. This is despite the fact that crypto assets such as Bitcoin (BTC) have more in common with gold, particularly from the perspective of being a relative safe haven instrument.
However, this doesn’t ignore the similarities that exist between fiat and digital currencies, while investors have also suggested that crypto was widely expected to impact forex trading heavily upon its initial inception. This feeling persists now, with crypto capable of changing the way in which money is transferred overseas and revolutionizing the wider fx space.
Crypto assets such as BTC have certainly disrupted traditional fx trading, with the USD/BTC having depreciated markedly between 2016 and 2017 before largely plateauing between 0.000091 and 0.000020.
Given the crossover between these two asset classes, it’s natural that they should present some shared risks to traders. We’ll explore some of these in the article below:
1. Rumour, Leaks and Speculation
For years, geopolitical events and speculation have impacted on the price of fiat currencies, just as company releases and financial updates have influenced share values in the stock market.
This certainly has a direct impact on perception and investor sentiment in these markets, and it can be argued that a similar trend is even more prevalent in the crypto space.
Perception in the crypto market also creates cyclical price movements, with this particularly likely to be borne out in the case of Bitcoin (BTC). For example, any negative news item or speculation about BTC tends to deliver significant price declines within a short space of time, triggering further losses for altcoins throughout the marketplace.
Conversely, BTC soared by 20% in February after Tesla owner Elon Musk added the hashtag #bitcoin to his Twitter bio, prior to the billionaire buying $1.5 billion of Bitcoin.
Inflation is a major macroeconomic factor; and one that has continued to impact on fiat currencies for generations.
It’s also a wider economic indicator across various markets and asset classes, and in this respect, it remains capable of causing significant swings in exchange rates and capital inflows over time.
In general terms, a nation with lower inflation rates will expect to see the value of their currency rise, with this indicative of increased consumer spending power. The inverse is also true, of course, so it’s important to factor this is as an aspiring investor.
The case is slightly different with cryptocurrency, which isn’t directly affected by inflation and actually serves as an inflation hedge as a result of its limited supply. However, inflation can still impact on your trading strategy and encourage you to invest in BTC, so sudden changes in rates may influence your short-term fortunes.
3. Interest Rates
We close with interest rates, which are often manipulated as part of wider quantitative easing measures and as a way of controlling inflation in the wake of major socioeconomic events. Take the impact of the coronavirus, for example, which saw entire economies closed down and base interest rates slashed in the process.
This has the effect of deincentivising foreign investors in particular, which in turn minimises capital inflows from overseas and naturally reduces the value of national currencies.
Of course, this may make BTC and similar assets more appealing to investors, who may seek out relative safe havens that are largely immune to macroeconomics and dwindling interest rates.
However, the enactment of higher interest rates during times of recovery could see BTC prices take a hit, as this will encourage investors to move their money out of speculative investments and back into more established fiat currencies.