Cryptocurrency Expert Explains Rise of Bitcoin
Speaking on the program, Smith said that bitcoin is a “speculative” and “volatile” medium, but it was a matter of understanding volatility and taking the right measures when trading. He drew attention to technological, political and regulatory factors that have driven bitcoin’s price, given the fact that the coin had surged more than 50 percent the last two months. He said: “There’s a lot of drivers to the price of bitcoin. There’s geopolitical drivers, there’s technological, [and] there’s regulatory to go with investor demand. So, it’s hard to isolate any one factor.”
Trade war between China and the US
According to Smith, bitcoin’s increase was affected by capital controls in Asian countries, primarily Korea and China.
Smith said: “The net effect of the trade war with China and the U.S. is that the [Chinese] yuan is hitting a six-month low. Much of the rise in bitcoin in 2017 came out of Asia — countries like Korea and China that have capital controls and, in many people’s minds, [devalue their currencies]. And therefore, bitcoin was either a hedge or just an outright way to get capital outside of that country.” What was eventually known as the “kimchi premium,” Smith explained, was bitcoin trading at very high prices on Korean exchanges during 2017 as a result of these restrictions.
This is of course not new. Since 2016, it was reported that, in order to bypass China’s capital controls, foreign exchange services in China and South Korea used bitcoin to transfer funds. In China, “the large amount of the yuan is not allowed to go abroad…Because of this, foreign exchange clients invested in the yuan in China and came to Korea and took the money.” As Bryan Rich reported in a Forbes article, “in late 2016, with rapid expansion of credit in China, growing non-performing loans, a soft economy and the prospects of a Trump administration that could put pressure on China trade, capital was moving aggressively out of China.” To stop this, the Chinese government increased capital controls to restrict any movement of capital out of China. Of course, bitcoin became a very resourceful way to move money outside the country, with China cryptocurrency exchanges accounting for 90% of global bitcoin trading.
Regulated trading platforms and Brokerages offering Bitcoin
Smith pointed out two more factors that helped push bitcoin’s price up. One was public excitement about the emergence of regulated cryptocurrency platforms and the other one was the “tremendous amount of optimism” about US-based brokerages offering bitcoin services to retail customers.
Particularly, Smith referred to the Consensus conference in New York which helped to increase the price of bitcoin from $6,000 to $8,000.” The conference created excitement around new launches of regulated digital asset platforms, such as Bakkt, Fidelity Digital Assets, and ErisX.
The third factor was, for Smith, the most important one: “Really, the big one is that there is a tremendous amount of optimism about U.S. brokerages, particularly online brokerages, offering bitcoin to retail customers in 2019. While no one has come out and said that openly, there’s a lot of talk about that, and I think people are buying bitcoin ahead potentially of that new investor demand.”
Smith has expressed his interest in bitcoin in the past, but in the interview he explained that he was not there to convert but to simply express what was happening. “I’m simply pointing out there’s a lot of optimism from people within the bitcoin community over things that have happened in recent months, and I think that’s reflected in the price,” he said.
While May has been a good month for bitcoin, it is also good to have in mind what was said in a recent Forbes article, that it is “important to remember that there’s still plenty of work for developers and users to do in the areas of decentralization and privacy.”
Sources: CNBC, Forbes, Bitcoin news