BLOCKCHAIN, Expert opinions

Digital financial assets today: What the bitcoin era holds for us

On Wednesday, November 20, the Russian Union of Industrialists and Entrepreneurs (RSPP) petitioned President Vladimir Putin to expedite the adoption of cryptocurrency legislation, several Russian federal media reported.

Many large companies that are members of the RSPP will soon be able to issue their own digital assets, while investors will acquire gas, oil, and metal tokens, which will become a promising source of capital. Furthermore, RSPP believes Russian digital assets may create conditions for reducing dependence on the dollar. It is difficult to disagree with a respected association such as RSPP. This initiative in itself certainly brightens the global outlook for innovation and investment in Russia as it will greatly simplify the process of attracting investment by small and medium-sized companies, and give retail investors access to something I would describe as a very promising investment instrument.

Let us discuss this in more detail and consider digital assets as an investment tool. It is no secret that we are living in a period of low rates with a prospect of further reduction. Indeed, a negative yield on bonds no longer seems to surprise anyone. However, this cannot last forever, and the tower will collapse once the bond value stops growing. What large players will do then is a big question I have no answer to.

Meanwhile, the Federal Reserve System is buying out its own treasury stocks worth $60 bln per month to ensure banks’ sufficient liquidity while claiming that it is not a new turn of quantitative easing (or quasi-QE). Cheap freshly printed U.S. dollars are being pumped into the stock market – primarily, as corporate giants like Apple are buying back their own stocks with bonded loans from investors ($7 bln in case of Apple alone). U.S. corporations’ financial reports are once again demonstrating a mixed dynamic and a slower growth of retail sales compared to last summer.

However, it appears that this, coupled with a dragged-out trade war between the United States and China (which seems to be finally looking at a solution as U.S. President’s economic advisor Larry Kudlow revealed that the parties are about to reach an agreement) and the unresolved Brexit issue, has not affected the S&P 500 Index that increased by 10% over a quarter. On the contrary, gold lost more than 7% over the same period. Did investors work up an appetite for risk again after the S&P 500 hit a milestone mark and with the Christmas race looming ahead? 

Possibly. At any rate, getting back to the beginning of this article and digital financial assets, this is something to be happy about. After all, cryptocurrencies today – coins and tokens – are purely a venture for most institutional investors and even more so for an average person. Restrictive regulations are, of course, hindering a full-scale market launch of the institutional smart money along with dozens and hundreds of thousands of retail investors. However, the Bakkt platform by ICE (New York Stock Exchange’s parent company) was launched successfully and institutional investors started trading physical bitcoin futures contracts several months ago.

The turnover in this period increased 6-fold and reached $10 mio per day (BTC 1K), but is still very small as compared to the traditional financial platforms. One good news is that despite the rejection in October, experts from the US Securities and Exchange Commission decided to reconsider the application by Bitwise Asset Management and NYSE Arca to launch Bitcoin-ETF. This is really good news because ETF is the bridge for private investors and another global connecting point between digital and traditional financial assets. If the Bitcoin ETF is adopted before yearend, we might see an explosive growth of the first cryptocurrency, and then altcoins, like in 2017, when Bitcoin futures were traded at the Chicago Mercantile Exchange.

In fact, 7 out of 9 of the annual Bitcoin candlesticks in 2011-2019 were high. If we trust this statistics, especially ahead of the upcoming Bitcoin halving in May 2020, this growth might happen. It is noteworthy that every time, approximately a year before the Bitcoin halving, the price of the first cryptocurrency was gradually increasing after a preliminary deep correction by over 80%. This has happened twice: in 2012 and 2016. At the time of the halving, as a rule, the price recovered by over 75%, and then grew by 6 and more times over the previous global high. Over the past eight months, the bitcoin price has significantly recovered from about $3,250 in February to the current $8,000. Based on this trend, the bitcoin exchange rate is expected to recover to $15,000 in May 2020 and to reach over $125,000 in October 2021.

In my opinion, this is the most likely scenario in case there are no major political or economic obstacles. And then we can expect capital movements of hundreds of percent, while investors who are ready to take high risks can expect high returns. As practice has proven and a research by the leading cryptocurrency exchange Binance shows, the buy & hold strategy with an investment horizon of 3 years is the most appropriate for this market. For instance, since the fall of 2016, despite all its fluctuations, ups, downs and shocks, the bitcoin exchange rate would have brought to a long-term investor (by Russian standards) an income of about 1,000%, from $700 to $8,000, even with the S&P 500 index climbing 50% and the gold value growing  by 15% over the same period.

As regards medium- and short-term prospects, the trading zone within $8,000 serves as a strong support, whose breakdown will lead to retesting the strong level of $7,200. However, currently the situation looks more like a “bear trap,” when marginal speculators are forced to take shot positions which are then removed from the market with a single strong daily candle, with another ‘sudden’ positive piece of news. This occurs quite often in this mega volatile market. You should remember that there are no guarantees in the financial markets bit only probabilities and competent risk management.

By Rufat Abyasov, Investment Manager, Vice President of Association Bitcoin Russia

Previous ArticleNext Article