Bitcoin & The Almighty Dollar

FBI agents were lying in wait for Cleber Rene Rizerio Rocha when he returned to his apartment complex in Westborough, Massachusetts. But federal agents were not waiting behind the door with a sock full of pennies. Instead, it was Rocha who was armed with a suitcase stuffed with over US$2.2 million. Rocha was acting as a courier and money launderer for one of the biggest Ponzi schemes in recent times — TelexFree. Stuffed inside Rocha’s box spring mattress at the Westborough apartment was another US$20 million in cash.

Cash, in particular the dollar has long been a favored currency of the lawful and the lawless. And in a volatile period for financial markets, the dollar has soared some 7% against a broad basket of currencies in 2018 and by 4% against a more select group of rich world currencies as well.

But as any weekend forex trading class will tell you, one of the basic lessons of trading is that what goes up must come down.

According to The Economist’s Big Mac Index, the dollar is overdue for a fall. But the way the all-beef patty, special sauce, onions, cheese, lettuce, pickles on a sesame seed bun hits the ground is an altogether different story.

Bearish sentiments expect the dollar to tank based on the expectation that GDP growth in the United States will slow dramatically. In 2018, growth was largely attributed to tax cuts, the effects of which are starting to wane. The prospect of rising interest rates is also expected to put a further drag on growth.

Oil also remains stubbornly low, which hurts investment in America’s important shale regions but provides a boost for economies in Europe and Asia which import oil.

The U.S. stock market is also reaching Peter Pan levels where valuations are increasingly divorced from economic and commercial realities.

Against this backdrop, some observers believe that the dollar’s unprecedented run-up is coming to an end.

Yet for criminals such as Rocha, the dollar is still one of the most rewarding currencies to hold onto. And it’s not a given that the dollar will fall.

The Trump administration, licking its wounds from the incredible loss against Nancy Pelosi’s Democrat-led House of Representatives might be looking for a quick win by ending the trade dispute with China.

The Fed’s Jerome Powell may decide that given the slowing growth in the United States, now is not the time to be a hawk when a pigeon will do just as well.

All these factors could continue to reinforce an already strong dollar.

But the dollar could also weaken under two possible scenarios.

Diet Dollar

As the threat of a U.S. — China trade war ebbs, tax cuts and looser monetary policy in China may start to stimulate consumption, goosing other Asian economies which supply to China and increasing demand for European goods in the Middle Kingdom.

Bond yields rise in the expectation of rising interest rates in Europe and as they start to fall in the United States, traders price in rate cuts as the dollar drifts down against the euro.

The British somehow figure a way out of the Brexit quagmire pushing up demand for the pound and capital is diverted to emerging markets in search of better returns, with stock markets rallying accordingly outside the United States.

This scenario (at least at the current moment) however, seems unlikely.

Even if the Trump administration hammers its sickles into ploughshares, Chinese efforts to stimulate domestic consumption may not have the effect that Beijing hopes for.

Already, reduced capital reserve requirements for Chinese banks have not led to increased loan disbursements. Chinese companies are also cutting back on spending and hiring.

Chinese workers are saving more as well, scarred by job insecurity and a stock market that no longer travels in one direction only.

Over in Europe, already strapped leaders will not be eager to raise rates any time soon. With no guarantee of consistent Chinese demand and populist right-wing leaders starting to take over national governments, Europe can ill-afford any sudden economic shocks. Best to leave interest rates where they are.

And finally, in quasi-European Britain, the paralysis of leadership strongly suggests that the United Kingdom will crash out of the European Union with nothing more than a wing and a prayer.

The More Likely Play

If the dollar were indeed to weaken, however, the causes would be far more pedestrian. Slowing growth in the United States compounded by slowing Chinese growth will put a drag on the global economy.

The Trump administration, whose ego has been bruised by a failure to deliver on election promises may look for a pyrrhic victory against China by upping the ante in the ongoing trade dispute and going full retard.

With China’s largest export partner closing its borders (no wall required), Chinese tax cuts and fiscal laxity may lead to greater savings. But with the yuan devaluing further, Chinese savers start to divert their hard-earned savings towards safe-haven assets such as gold and as demonstrated before, Bitcoin.

Faltering Chinese demand then leads to the realization of Europe’s dependency on Chinese consumption of BMWs and Bottegas, putting further pressure on an already unsteady eurozone economy.

Risk assets sell off sharply and emerging markets are particularly hard hit. In these uncertain times, Swiss francs and the yen rise as investors clamor for what safe havens are available. Gold soars and the dollar falls.

A Bitcoin in Time Saves Nine

What happens next depends a lot on what happens in China. A trade deal between the world’s two largest economies may help to shore up demand for emerging market currencies and prevent further dollar rises.

Effective Chinese fiscal stimulus (as unlikely as that may be) could help to increase demand for riskier emerging market currencies, to the detriment of the dollar.

For investors reluctant to sell out of risk assets, a case could be made for taking out some insurance by hedging their riskier positions with some Swiss francs, Japanese yen, gold, and even Bitcoin.

Bitcoin’s correlation with other cryptocurrencies is very similar to that of gold and other risk assets. During times of uncertainty, traders sell out of altcoins back into Bitcoin or Ethereum.

Plus, because Bitcoin’s price is measured in dollars and often compared to gold as a store of value, a case could be made for some limited exposure to Bitcoin as other “riskier” assets fall in value.

The prospect of a cheapening dollar means that Bitcoin (which shares an inverse relationship to the dollar) may rise in value.

As unlikely as it may seem, in market turmoil, the least risky of risk assets suddenly become “safe.”

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Patrick Tan

Written by

CEO of Novum Alpha, an all-weather digital asset trading firm that uses Deep Learning tools to deliver dollar-returns in all market conditions.

The Capital

A publishing platform for professionals in business, finance, and tech

Patrick Tan

Written by

CEO of Novum Alpha, an all-weather digital asset trading firm that uses Deep Learning tools to deliver dollar-returns in all market conditions.

The Capital

A publishing platform for professionals in business, finance, and tech

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