Morning Edition 8.7.2019

Bitcoin trades above $12,000 per coin amid global financial market volatility

Today, August 7, 2019, Bitcoin is trading above $12,000 — up from less than $10,000 just a few days ago — against the backdrop of the US Government labeling the Chinese government a currency manipulator two days ago.  And even though China did not further depreciate its currency yesterday — which non-action caused global equity market prices to breathe a collective sigh of relief and rebound a bit — the fear in some parts of the global financial markets none-the-less still remains evident. 

Some $15 trillion of bonds now trade at prices so high that investors expect negative returns just to maintain a safe part of their portfolio.  For example, “bunds” (bonds issued by the German federal government) maturing in ten years now carry a price of over 106; so, even after receiving interest payments for the next 10 years and 100 when the bunds mature, the yield-to-maturity is approximately negative 0.53%.  Some $15 trillion of bonds around the world now have negative interest rates.  This reflects a great deal of fear among some market participants and also many other market participants’ wanting a “very safe” (even if negative yielding!) portion of their overall portfolio if they are going to hold an allocation to other investments (such as stocks).  In this milieu, we can observe from market prices that many investors are reassessing the risk-reward trade-off of traditional zero-yielding assets like gold (which is trading up today) and digital currencies such as Bitcoin, which prices today went above $12,000.  If an investor believes Bitcoin may prove to be a good store of wealth amidst equity price declines in the financial markets, that investor may choose to invest in Bitcoin rather than negatively yielding government bonds.  

As an important side-note, we do also recognize that many geopolitical hotzones are getting hotter: the US tightened sanctions on Venezuela recently and the struggle to maintain navigational freedom through the Straits of Hormuz is also causing strains between Iran on one side and the US and Britain on the other.  These phenomena and others may also be inducing some digital currency buyers to purchase digital assets as a store of wealth, protection against depreciation of their local currency, or provide other benefits.

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

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