A recent study investigated the complex metrics, indices, connection and linkages between BTC and Forex (Fiat Money) in two different groups of nations, mainly G7 and BRICS, which were all affected by the pandemic of 2019, and also by the fallout of the present Russia-Ukraine conflict. This intensive study by global financial experts, market buffs, currency traders/analysts and leading think-tanks came up with mixed results, both for cryptocurrencies like Bitcoin and foreign exchanges like USD, EUR, GBP, CAD and AUD. Let’s dive into it, straightaway.
An Overview or Introduction
In the recent past, a lot of crypto analysts, traders, forex brokers, scholars have focussed on this particular subject, and provided valuable insight on the trends in the cryptocurrency market. Some have shared their knowledge on emerging technologies in digital currencies, while others have shown ways to individuals on how to earn the best returns in the shortest time. Irrespective of everything, crypto tends to be an exciting subject for all financial geeks and economists.
A majority of ‘old school’ investors in the US, Europe and Asia got attracted to crypto assets & currencies, as it proved to be a perfect alternative for making short-term, as well as long-term monetary gains through dynamic investment opportunities. Moreover, the overwhelming and extensive proliferation of Bitcon (BTC) as a successful digital currency has increased the awareness of decentralized currencies in emerging markets of the world.
Nevertheless, with such intensive study and research, as performed by scholars of economics, it has still not been able to clearly determine the dependency or link between Bitcoin and forex. Though investors are aware of how to pay with Bitcoin when buying or trading in forex, the underlying connection and the study of dynamics between the two are still in their nascent stage. As a matter of fact, due to the stringent regulatory announcements made by BRICS nations regarding cryptocurrency volatilities and returns, a few important linkages between emerging economies and cryptocurrencies have been discovered.
This particular study aims to provide a significant and crucial insight to all risk-conscious investors, as to how cryptocurrencies like Bitcoin (BTC) and Ethereum Pay (ETC) are linked to fiat currencies, so as to minimize their risks and better investment portfolio. The well documented study also revealed, as to how Bitcoin crashed during a period from 2013-2022, and how the BTC market remained isolated from the traditional foreign exchange market. Moreover, the said research also studied the impact of Bitcoin downfall on fiduciary currencies.
A Synopsis about BTC & Crypto Linkage
A cryptocurrency works via a blockchain payment gateway, which supports online transactions without any kind of financial intermediaries. It is a fully decentralized system, with NO control by the government or federal authorities. Since the introduction of Bitcoin in 2008, the overall crypto market has achieved considerable traction vis-a-vis the foreign exchange (FOREX) market, as the role of financial instruments have become increasingly relevant. Overall, the Bitcoin market seems to be the most widely accepted, due to the failure of local banks and financial institutions, because of the financial crisis of 2007-08. As of today, the overall market capitalization of the world’s top virtual currencies have been estimated around $150 billion, representing close to 50% of the total cryptocurrency market capitalization.
There are some scholars who are of the opinion that Bitcoin (BTC) has practically no fundamental value, unable to function in the same manner, as any other fiat currency does. On the contrary, it is a kind of speculative asset or currency. However, some experienced analysts argue by saying that being purely speculative in nature, BTC also represents a standard financial asset. A few other analysts and scholars are of the idea that Bitcoin has NO intrinsic value, thus cannot compete against traditional currencies and forex. All things said, Bitcoin clearly reveals several fiat money-like properties, making it easier to assign a legitimate value to this widely traded digital currency.
Some Additional Features and Properties of BTC
If you’re considering investment in BTC, along with forex, it is definitely a safe option, as it exhibits robust hedge fund abilities, when compared to general commodity indices. However, a research conducted by Baur and Lucey in 2015 found that BTC exhibits significantly lower correlation with conventional assets like commodities, stocks, shares and bonds.
Almost all are of the opinion that Bitcoin must be included in well diversified investment portfolios, as it can considerably improve upon the overall risk/return profile. As a matter of fact, there is a very low correlation between BTC and various other conventional assets, thus it is often regarded as a perfect diversifier. FYI, the link between Bitcoin and a few notable fiat currencies like Euro and Japanese Yen is unexpectedly weak, but not so with other prominent foreign exchanges. All crypto traders and investors must also know about the presence of speculative bubbles in the BTC trading market vis-a-vis other financial markets.
Some prominent financial scholars and eminent economy experts do not consider Bitcoin as an alternative for fiat currencies, rather a befitting complement for trending digital currencies. BTC is highly volatile in nature, which is not the case with traditional currencies. Therefore, a majority of traders and merchants fear the risks associated with Bitcoin trading, even though they are aware of certain trading platforms that accept digital currencies like BTC, ETH, LTC, etc. for paying through a digital wallet. After having said all these, there’s no significant evidence that points to or proves that the digital market is interrelated or connected with forex in any manner whatsoever.
Of late, the inter-dependence between BTC and fiat currencies in the G7 and BRICS nations have shown an increase during the period 2018-19. And post COVID-19 pandemic, it has been observed that the linkages between Bitcoin and other currency groups has steadily increased from a ratio of 0.03 to 0.05 in these countries, which accounts for nearly half of the global trade and market. Further studies can precisely establish the links between conventional and digital currencies for best bringing out or deciphering the complex connectedness across crypto and forex markets.