Bitcoin, Ethereum Volatility Soars: Latest Analysts Views

Image © Adobe Stock

Cryptocurrency prices fell further ahead of the weekend, rounding off what has been a volatile week for the asset class which had only days earlier seen its most famous constituents hit record highs.

Analysts are saying shifts in investor risk appetite could be a fundamental cause for the decline, while unease at the world's central banks over what is a competitor to fiat currencies is being cited as another.

The price of Bitcoin in pound sterling has fallen back to £12653.17 ahead of the weekend, with the dollar quote coming in at 16912.96 and the Euro quote coming in at 14179.80.

"Bitcoin and altcoins are stable following yesterday's crypto-carnage," says Jasper Lawler, Head of Research at LCG.

The sharp declines come just days after Bitcoin printed a new record high, with a confluence of factors being attributed to the sudden turn lower.

"Cryptocurrencies are generally suffering an episode of weakness, perhaps after noted digital currency exchange Coinbase’s CEO was out overnight to criticise a rumoured plan by the U.S. Treasury Department that would require tracking of owners of 'self-hosted' cryptocurrency wallets and therefore saddle them with data collection requirements to ensure, for example, that all parties to transactions can be identified," says John J Hardy, Head of FX Strategy at Saxo Bank.

Bitcoin in Sterling

Image courtesy of Kriptomat.

"Bitcoin's (XTB) decline turned more severe," says Stephen Gallo, European Head of FX Strategy at BMO Capital Markets. "Gold and XBT have experienced a 'repricing' of similar types in recent weeks owing to the visible progress on vaccine efficacy and higher equity prices."

Where gold has fallen, the likes of Bitcoin and Ethereum have risen, suggesting an inverse relationship where Cryptocurrencies benefit when risk sentiment 'is on'.

"The increased demand for riskier assets is also a possible reason for the surge in many cryptocurrency prices," says George Vessey, Currency Strategist at Western Union. "Professional investors are increasingly looking at cryptocurrency as a long-term investment and since the positive vaccine developments over the past few weeks, the search for yield has erupted. Increased risk appetite is reflected in the currency markets by revaluations of pro-cyclical currencies. Investors have dumped safe havens such as the JPY, CHF and USD and bought into riskier currencies like the NOK, AUD, and NZD."

The price of Ethereum in pounds has meanwhile fallen back further to quote at 380.42 while the dollar price is at 508.49 and the euro price at 426.32.

Ethereum

Image courtesy of Kriptomat.

"One argument for the well-known cryptocurrency’s meteoric rise over the past few months is that Bitcoin is seizing the spotlight from gold as a hedge against inflation risk and a weaker USD in 2021. Bitcoin rallied to a new record high (on Wednesday), just shy of $20k, but has tumbled sharply," says Vessey.

Vessey says that demand for alternative currencies in a world where central banks are furiously expanding their balance sheets will likely remain a fundamental underpinning for Cryptocurrencies going forward.

"Many analysts are forecasting the USD to seriously weaken next year amidst an era of ultra-low interest rates, an abundance of liquidity and a rise in demand for alternative currencies," adds Vesssey.

BMO Capital's Gallo says there could also be a regulatory angle behind the renewed volatility in the asset class, as governments and central banks seek to limit the influence of commoditised cryptocurrencies like Bitcoin, "thereby reaffirming the dominance of the fiat currencies they control".

"Though demand for fiat alternatives will continue to grow, the aforementioned volatility in cryptocurrencies will probably be a feature of these financial variables for some time to come," says Gallo.