Attention has been focused on the fact that Bitcoin broke below the psychologically important US$6,000 mark in overnight trade as other cryptocurrencies plunged but few have offered an explanation for the meltdown.
Knowing what is driving the market is more important than the price action as it will give you clues on how you could profit from the trend or limit your losses – depending on which side of the trade you are standing on.
One reason some commentators have used as a driver for the sell-off is the delay by the US regulators in approving a Bitcoin fund, but I think there is a more important and sinister factor that has triggered the crypto-implosion – the crumbling Turkish currency.
The fear of contagion from the crash in the lira to record lows against the US dollar has caused other emerging market currencies, from the Indonesian rupiah to the South African rand, to tumble in sympathy.
It isn’t by coincidence that cryptos are on the nose too as investors are dumping anything they consider risky and fleeing to the safety of the US dollar and the Japanese yen.
This is telling as cryptos like Bitcoin are supposed to be a safe haven for those wanting to escape the corruption of the global banking system.
Why else would you invest in Bitcoin and its derivatives if not for the belief that it is a safe store of value?
But the painful drop in cryptos proves that it is no safe harbour during an economic storm and this could be the death knell for most digital currencies, particularly given that the fallout from Turkey could worsen with the country imposing tariffs on some US goods like Apple Inc.’s iPhones.
The slide in the lira has been exacerbated by US President Donald Trump’s decision to double tariffs on Turkish steel and aluminium as he tries to pressure Turkey to release a US pastor who is charged with terrorism offences.
The trade war looks set to escalate and that’s bad news for emerging currencies and the risk trade. This will give investors even more reason to dump cryptos, although some supporters could point to the fact that another established safe asset is also taking a beating.
Gold has offered no protection to the wary during the Turkish meltdown and has fallen below US$1,200 an ounce. There goes 3,000 years of history where gold had always been a hedge against economic crises and uncertainty!
The thing with the precious metal is that it only works well as a hedge when the problem relates to the US dollar – such as during the GFC.
In this case, it’s emerging economies and not the US that is causing the consternation. Its fool’s gold to think that the yellow metal can outperform under such conditions.
However, does this mean you can depend on cryptos to outperform if the greenback comes into strife? I certainly won’t bet on it although we might have to wait for the next GFC to find out.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.