27 June 2017

It's not yet a marriage, but bitcoin is definitely 'in a relationship' with the worldwide financial system. The flirtation with the crypto-currency isn't over yet, however. There is still a lot of caution. Gradually it is being accepted as an alternative to major currencies. Granted, it's a volatile asset in its own right and not connected to any official government. Earlier this month, the virtual currency beat the $3000 mark for the first time. Then it had a dramatic $300 one-day drop on 12 June. That's certainly one of the reasons that bitcoin isn't yet seen as secure as institutional currencies. But - much like an engagement - investors are willing to give it a chance.

The UAE, for example, has stopped just short of a full commitment. In January, the Central Bank of the UAE banned virtual currencies except for bitcoin. The key difference between virtual currencies is the underlying database technology called the blockchain. Its cryptography keeps the database secure for millions of users and gives bitcoin a credibility shine. The technology used to exchange virtual currencies is highly efficient. It is considered to be more secure than the traditional centralised databases. Now it's an attractive bandwagon that banks and other financial institutions are jumping on one by one. Emirates NBD recently introduced blockchain databases for its cheques. By no means is this a ringing endorsement for bitcoin, but it's a nod of respect. 

So much for the official, institutional position. Then again, bitcoin traders pride themselves on investing in an unofficial currency. The volatile crypto-currency is not controlled by centralised governments. We live and trade in a world where volatility has become par for the course. Under the circumstances, it's not even ironic that some see bitcoin as a hedge against high-risk market conditions. The most recent market shocks were the Qatar crisis and the UK elections. The virtual currency's recent rapid upward trend signals increased demand in the wake of these events. Can you call bitcoin a safe-haven like gold? The answer to that would be no, not like gold, which quickly becomes bearish when the Fed raises interest rates. So, it's an alternative safe-haven, an alt. control. delete kind of haven, a restart rather than a temporary oasis like gold.

One cannot ignore the risks associated with virtual currencies, though. Gold is a known factor with a track record stretching back many decades. Its performance can be mapped and forecast using an abundance of historical data. Yes, it is non-yielding and often used as a short-term shelter from the storm, but it is also a tangible and valued asset accepted by investors. Bitcoin is less transparent, historically speaking. It's a relatively new asset with a troubled regulatory history, at least at the beginning of its existence. The bad boy of the markets, if you will. The longer it survives, however, the better the chances of it becoming an accepted form of exchange. The fact that it's uncorrelated to other assets seems to work in its favour at this point. It's untainted by the usual macroeconomic ups and downs that pressure other assets. But - and it's a big but - that makes it difficult to forecast. 

All in all, bitcoin is wooing the financial markets and making some headway. More conservative investors aren't likely to fall in love with it. At this stage of its evolution, Bitcoin attracts interest without wholehearted commitment. Given the battle against it nine years ago when it was introduced to the financial markets, that's already a big improvement. 

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