In the midst of rising U.S.-China trade war tensions over sanctions against Iranian oil, investors are likely to look to bitcoin and other cryptos as alternative options to traditional stocks and other fiat-driven investments. While uncertainty in traditional markets has benefited the crypto market, volatility remains a substantive issue for investors seeking long-term price stability.
The current geo-political turbulence is just one factor among many external, dynamic forces contributing to growing economic uncertainty. With geo-political tensions consistently having a negative impact on the global economy throughout modern history; individuals, businesses, organizations, and some governments, have reached a pivotal point where cryptocurrencies are slowly becoming more accepted as the inevitable future, and the need for a transparent, scalable, and viable stable store of value in the form of a stablecoin cryptocurrency solution is undeniable.
The Global Economy is Suffering as a Result of the U.S.-China Trade War
Trade fluctuations this year have been defined by growing tensions between the U.S. and China. Reducing the trade deficit is part of the current U.S. administration’s strategy for creating jobs. A trade deficit occurs when a country imports more than it exports. In 2018, China had a trade surplus of $375 billion with the United States, which the U.S. views as evidence of unfair competition. The administration’s solution has been to place tariffs on goods imported from China.
The most recent flare-up between the U.S. and China is a consequence of China ignoring the U.S.-ordered sanctions against Iranian oil. The U.S. withdrew from the Iran nuclear deal in May of 2018 and has since reimposed economic sanctions, including demands that Iranian allies, China chief among them, refrain from purchasing Iranian oil. In June, China purchased more than a million barrels of crude oil from Iran, defying the United States’ authorization.
Uncertainty around whether the U.S. would retaliate against China’s violation of economic sanctions against Iran added a layer of unpredictability to global oil markets. The news of potential talks between U.S. and Chinese negotiators has somewhat eased pressure on oil prices. However, the volatility generated by uneasy relations between the two world powers illustrates the tenuous nature of market stability.
Investors Look to Crypto During Global Economic Turmoil
Interestingly, recent trends show investors turning to bitcoin and other cryptocurrencies in the wake of turmoil in traditional markets. According to Grayscale, bitcoin gained 47% in the downturn following growing unrest around U.S.-China trade relations. Bitcoin also performed well in other economic events, such as Grexit and Brexit.
The reasons for increasing interest in crypto during periods of fiat market instability are plain. Bitcoin and altcoins are not backed by governments or traditional banking institutions, creating alternative markets whose ups and downs often run contrary to fiat markets. In Venezuela, for example, investment in bitcoin has skyrocketed. With hyperinflation wreaking havoc on the country’s economy, people are seeking out bitcoin as a store of value that can’t be impacted by the Venezuelan government.
The problem is that many traditional investors and money managers expect price fluctuations to fall within a range considered “normal” by fiat market standards. Managers of pension funds and endowments, for example, seek investment opportunities that offer little risk and promise gradual appreciation in value over time; however, there is no existing crypto or fiat currency that successfully accomplishes this to its fullest potential.
The Need for a Financial “Safe Harbor”
With traditional traders increasingly seeking out crypto investments in times of fiat-market instability, doubts in the viability of a sustainable crypto economy should deflate. Unfortunately, volatility remains an outstanding issue for crypto investors seeking safe harbor for their assets. Looking at a bitcoin price graph of just the last 3 months shows a difference of $7,278 between the high of $12,576 in July and low of $5,151 in May. Not many fiat currencies can compete with that level of short-term variability.
Price fluctuations notwithstanding, bitcoin is still considered the most stable cryptocurrency—highlighting the ongoing need for a viable stablecoin solution. A stable cryptocurrency should not be pegged solely to fiat currencies, because it would experience inflation on par with its fiat counterparts. Nor should it be pegged to cryptocurrencies, given the extraordinary volatility plaguing these coins. An algorithm-based pegging model incorporating diverse and objective economic indicators may garner the most assured level of predictability.
A stablecoin that is guaranteed to appreciate in value over time would not only provide people surviving economic upheaval with a predictable store of value, but it would also be a preferred hedging instrument for businesses, governments, and anyone wishing to protect their investments against the impacts of inflation and other market factors. Retirees could rest easy knowing their pensions are secure. College saving plans would be invulnerable to market changes. Remittances could be sent without fear of the value changing before the transfer completes.
If there is a silver lining to the stormy cloud created by U.S.-China trade tensions, it’s that the consequential strains on the fiat-market are spurring interest, trading, and investment in crypto alternatives. Looking to the future, development of forward-thinking stablecoin solutions would seem incredibly worthwhile endeavors. A digital currency that is resistant to market instability, volatility, and political biases, which does not depend on the strength or weakness of fiat markets would potentially transform the global economy to one centered around a safe harbor for investor holdings.