The influence of geopolitical tensions on cryptocurrencies

Tuesday, 17 March 2020

Since the beginning of 2020, cryptocurrencies have risen sharply against the backdrop of a worsening relationship between the US and Iran. Many investors see Bitcoin and its analogues as a “safe haven” for their funds during global shocks.

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In the first days of January 2020, the price of bitcoin increased by almost 13% – to $ 8.1 thousand per coin, for the first time since November 2019, exceeding $ 8 thousand. Ethereum rose by 11% (to $ 143.5), ripple – also by almost 11%, up to $ 0.213, according to the Coinmarketcap website.

The unexpected increase in bitcoin (BTC) after falling below $ 7,000 was associated with an escape from risks amid escalation of the conflict in the Middle East.

However, the truth is that traders are trying to tailor the facts to the theory they need. Despite the bullish potential of bitcoin in the long run, its correlation with events in the Middle East is not as obvious as, say, in the case of oil prices.

According to analysts, in the coming year, the dynamics of the courses will be affected by changes in the rules for mining virtual coins and new amendments to the worldwide digital laws.

Firstly, excessive speculative volatility and lack of legal status in most countries of the world make Bitcoin a dubious refuge. In July last year, Iran legalized cryptocurrency mining, but digital assets themselves are still outlawed and are not a means of payment in the country.

Secondly, the war with Iran (if it takes place) can bring the onset of the global economic crisis with all the consequences for Bitcoin. However, in times of uncertainty, people choose familiar solutions, and cryptocurrency does not apply to them.

Thirdly, cryptocurrency infrastructure is poorly developed in Iran, and US sanctions block residents from accessing foreign trading floors. The lack of liquidity and isolation from global trading platforms make digital assets useless as a currency, and the constant threat of losing access to your wallet is doubtful as a means of accumulating and saving value.

And yet, according to worldwide analysts, the whole Middle East situation is connected with the reaction of investors to the aggravation of relations between the USA and Iran. Bitcoin (BTC) began to fall in the afternoon at four on January 2 and, by the beginning of the Asian session on January 3, formed a bottom at $ 6883. Then, literally within a few hours, the first cryptocurrency returned to the area above $ 7000 and for some time overcame the $ 7300 mark. In total, bitcoin grew about $ 500 or 7%.

US forces rocketed an airport near Baghdad on the evening of January 2nd. As a result of the shelling authorized by US President Donald Trump, the commander of the Al-Quds special detachment of the Islamic Revolutionary Guard Corps (IRGC) Kassem Suleimani was killed.

The world smelled the war, or at least a serious escalation of geopolitical tension. Oil has risen in price, traditional safe haven assets, such as US Treasury bonds, yen, gold, also rushed up. The growth of bitcoin was also quickly associated with this event, going through a logical chain, which implies the purchase of cryptocurrencies in conditions of global tension.

The threat of a global recession amid a sharp increase in inflation is another argument in favor of the Bitcoin rally against the backdrop of an aggravation of the conflict in the Middle East.

The global crisis could be the impetus that will provoke the formation of a new bull trend in the cryptocurrency market.

Traditionally, during the growth of geopolitical tensions, investors begin to actively buy gold as a reliable means to save money. As many experts noted, recently bitcoin has also acquired the properties of a protective asset.

Geopolitics affects the course of bitcoin.

Previously, cryptocurrency and gold rose in price during the intensification of the US-China trade war, when the yuan weakened. Now we see that the intensification of tension between the States and Iran has also caused a simultaneous increase in gold and bitcoin prices.

In 2019, bitcoin managed to rise by almost 94% – from $ 3.7 thousand to $ 7.2 thousand. In July, the price of a coin briefly rose to $ 13 thousand. According to experts, it is precisely the aggravation of the trade conflict between the United States and China in The middle of the year became one of the main reasons for the increase in cryptocurrency prices. However, already in the fall, relations between the two countries were warming, so digital money became cheaper.

In addition, last year, investors were interested in the initiative of Facebook to launch its own cryptocurrency Libra. The optimism of the digital money market participants was also briefly supported by statements by the Chinese authorities about the need to develop blockchain technology. However, the PRC leadership has so far maintained a ban on digital money transactions.

Also global market regulation has become a constraining factor for the growth of cryptocurrency prices.

So, in June, the FATF Anti-Money Laundering Development Group tightened control over the industry. Now, the cryptocurrency exchanges of countries participating in the organization must disclose and provide each other with complete information about their users. In July, a similar measure was approved in EU countries.

The authorities of many countries see that huge amounts of money are concentrated in cryptocurrencies, which are not regulated in any way. Therefore, governments are trying to take this financial flow under their control and make it more transparent.

In 2020, the mood around Libra will affect investor sentiment. The successful creation of this cryptocurrency can increase the influx of investments into the market.

This year we can see a turning point for the world of cryptocurrencies. In the summer, Libra developers will try to launch their system, eliminating all disagreements with lawmakers and regulators. Depending on the success of the project, cryptocurrencies will either prove their importance and the right to exist, or investor’s interest in them will gradually fade.

Conclusion:

The market share of cryptocurrencies is very low compared to the world economy. Thus, in skillful hands, any world news can be easily used to manipulate prices. Each type of manipulation requires a separate control and prevention tool. However, a large-scale fight, with a similar influence on the market, can only be discussed after the legislative regulation of the cryptocurrency market.

If, however, following some news you have decided to invest in cryptocurrencies, keep in mind that any investment is done with a prior study, and cryptocurrencies are part of an area with high risks. Be vigilant and don’t let yourself be manipulated.

May the blockchain be with you!

 

de Sergiu Marandiuc

 

Author: Editor

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