2018 – currencies to take centre stage


By Anand James

 Bitcoin, a fool’s gold?

Most conversations about Bitcoin starts with a fearful glance at its meteoric rise, and then meanders along the conveniences and advantages for a digital currency, before finally resting firmly on the lack of trust on paper currencies.

The “lack of trust argument” is not a new one. It had kept gold glittering even decades after gold standards were abandoned. Global trade has also seen various paper currencies racing to be the most favoured form of exchange though none excelled enough to best the US Dollar. If at all the embrace of gold standard and the exit from it has taught us something, then it is that it is a folly to premeditate the impact of contingencies or market forces on the global trade and the exchange system, and our best chance lies in giving a free rein to market forces and build safeguards around it, on the go, if not proactively.

That takes us back to the bitcoin question. Is it ready to replace US Dollar or Euro as the currency of choice? Certainly no. Is it a store of wealth, the position long held by gold? By far no, at least not yet. So, is it ready to be dismissed as a wild goose chase, where some have gotten ultra-rich, and some others are about to burn their fingers? What is certain is that the block chain technology behind crypto currencies like bitcoin is poised to remedy a lot of issues with present forms of currencies, like transparency, tracking, security etc. It is also highly likely that the technology will act as the next major disruptor to business, by eliminating lot of intermediaries. It is this potential that fuels the price discovery race that Bitcoin investors have found themselves in, catapulting its prices to USD 17,000, a whopping gain of 1600% in 2017.

Who will blink first, Currencies, Equities, Gold or Bonds?

2017 will be seen as a watershed year for Bitcoin because futures trading was introduced for Bitcoin, and for once, the talk is not as much on its fanciful gains. Introduction of futures trading, presently on CME and CBOE, will mean that bitcoin has begun to get functionality like other currency systems, by way of entry and exit routes and hedging mechanisms. It also means that existing system’s regulators will get a foothold into the Bitcoin universe that has so far been enjoying being in an alternate sphere.  Central Banks, the world over have taken note, some supportive, and some have sounded warnings. It is however, a bit premature to see Bitcoin replacing the existing systems in a hurry, but, the juggernaut of blockchain technology has surely begun to roll.

Currencies and Equities

RBI had earlier served several warnings on Bitcoins, but our markets would be more interested in the currency restrictions that could follow from US and China, the dominant players in this spectrum. The crackdown by China on Bitcoin in September can also be seen in the context of the deleveraging measures that it has been pursuing, aimed at reducing debt, nullifying chances of asset bubbles and a gradual tightening of interest rates. Through its minor push in rates by 5 bps, just hours after FOMC’s rate hike, it is clear that global interest rates, including India’s is north bound. The Chinese move did take markets by surprise. Though the 5 bps was too feeble to have caused much of a jitter, it did remind markets of disruption if rates were moved swiftly. Meanwhile, the US angle has more to do with our foreign reserves. The reserve is over USD 400 billion now and is approaching two percent of GDP, which is the threshold level that US Treasury considers as amounting to unfair currency practices. FPI flows into debt, which is at record level hence stands threatened, but bond prices are already feeling the pressure of the potential of rates having bottomed out. Hence longer term bond prices feel the heat, though short term bonds could still see firmness at least during the first half of 2018, as interest rate expectations take better shape, which would also mean that currencies are likely to be more volatile than other assets. That will also be a period when equities should win back the preference from bonds, which has been the case as per FPI data in 2017. Small and midcaps have registered sustained outperformance over benchmark three years on the run, but it is time to add stability to one’s portfolio while increasing exposure in large caps or the benchmark index stocks, and if possible a little bit of gold.



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