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Eschewing Traditional Fundamentals to Understand the Bitcon, Cryptocoin Market

Currencies / Bitcoin Dec 05, 2013 - 09:41 AM GMT

By: Keith_Hilden


As Bitcoin and other cryptocoins are gaining interest with Wall Street firms and tech aficionados alike as an asset class and/or emerging currency to get exposure to, there is a need to understand these cryptocurrency markets. However, we are quickly learning as a group that cryptocurrencies are not understood in the same way as traditional asset classes. We are dealing with new market dynamics, and as such we need to adopt new thinking in order to understand the fundamentals and the drivers influencing price and direction in the Bitcoin and other cryptocurrency markets.

A Market Without Borders Can’t Be Understood by Traditional Fundamentals

The first dynamic to be understood is that unlike housing markets, stock markets, bond markets, and the like, prices are not walled off by national borders. If we think of traditional investments as in a flow of water, we can think about it in the following way.

We start out with a liquid investor, who holds cash and wants to invest this cash to get a return on investment. Let us call this cash, “water”, for the ease of this example. The investor sends the water flow to the gatekeeper, whether it be a broker, or a bank, or other intermediary. The flow stops, as there is an initial dam erected in the form of the registration process in the country of jurisdiction. Then the water flows onward and diverts into various channels as it follows its investment path. The water finds its destination asset, and then sits there until the investor decides to divert that investment flow into either another asset for further appreciation attempts, or simply returns the investment flow back into the original investor’s account. At this point, we have gone full circle in a traditional investment with water as our example.

In the event that the “water” traveled to an abroad market, there would be an additional process to this. Some countries would require additional paperwork and registration in order to allow this water to pass into their borders and regulatory markets, of which the investor would do themselves, or hire a broker to do it. This water would then pass through the “dam”  to continue on to its investment target. Some countries would then either allow this water to flow back to the original investor’s country, or place dams preventing the water from returning back to its country of origin.

Other countries would outright restrict in various ways the outward flow of water held by their own citizens, or investment capital, outside of their country. While others would implement restrictions not letting foreign investors’ water to enter in the first place.  In either case, the investment flow is either blocked partially with the need to get the capital approved through additional applications, or the need to find an intermediary to facilitate the investment in the second country. This is the state of traditional international investment markets and asset classes today.

Every investment class and asset class has up to now followed this model, and this served two functions. One, it served as a gatekeeper to another asset class market in another country, requiring the need for additional applications and/or the need to find an intermediary for the investor to continue. Two, it served as an isolator in prices in national markets. Therefore, while the prices of houses for example could be affected by outside investment, we find in many cases an array of regulatory red tape and roadblocks presented in order to put up a dam to restrict the “water” of investment flow into these markets. This is why countries have laws outlawing or restricting the ownership of real estate by foreigners, for example. This has its own purpose of maintaining price vs. income stability for housing and other asset classes to ensure that the local people of that country have the reasonable ability to buy houses, cars, and local investments at a fair price. The door to investment is thus open, but dams are erected that force the water to be diverted to channels. We call this in plain English in the US things like Know Your Customer, the Patriot Act, and other laws and procedures for anti money laundering and compliance purposes.

Bitcoin and cryptocurrencies in general are the first instance in history in which we do not have these dams erected, which allows investment capital across the world to flow to the form of capital of least resistance and offering the highest return. This is creating economic dynamics that up to now were not before possible due to the gatekeeping structure of international investment in the world. If the gatekeeping structure of international investment was not put in place the way it is today, 90% of Detroit would be owned by Beijing and Bangalore, due to their ability to access the housing markets without their investment flows being diverted by the gatekeepers. National investment laws prevent this from occurring.

These dynamics lead to never before seen economic forces of surges from other countries directly affecting global holders’ returns. Currently China dominates the Bitcoin market in global Bitcoin flows, and this is having a real-world effect on Bitcoin’s price in the US. There is a premium on the price in Bitcoin in China, and unlike other traditional investment vehicles, this premium is having a driving effect upward on Bitcoin’s price.

Never before did investors have to monitor the developments of every single country on the planet in order to gain actionable market intelligence on an asset class. But this is what’s happening. China was always a fervent adopter of Bitcoin from Day One, and compromised a sizable amount of the Bitcoin community from early on. It is no surprise now that they have come to dominate the market. But this isn’t the whole story. We hear little of other nations besides China and the US dominating Bitcoin and cryptocurrency news. That is about to change.

We hear little of imams debating fatwas on Bitcoin- so far. Ultimately, the leaders of the Muslim world will have to make a stance on Bitcoin such as they did in 2010 with the World Islamic Mint when the provincial government of Kelantan in Malaysia allowed workers to be paid and pay for products and services in gold dinar. Will they endorse Bitcoin? Or will there will be calls for jihad against Bitcoin in favor of the gold dinar?

We hear little of whether aid will be delivered in Kenya via smartphone payment, as Kenya currently leads the world in mobile money. What if MPesa makes a move toward integrating its payment system with Bitcoin or another competing cryptocurrency, and essentially integrates cryptocurrencies into the #1 digital money country in the world? And what implications will there be for a similar rollout of cryptocurrency in sub-Saharan Africa? Could Bitpesa’s move to integrate Bitcoin payments in Kenyan mobile payments be the reason we’re all Googling “Bitcoin Africa” and not “Bitcoin China” in 2015?

We hear little of whether Putin will publicly endorse Bitcoin at the next Shanghai Cooperation Organization meeting in Tajikistan in 2014, similarly to how he endorsed a world without the dollar as the global reserve currency in 2009. Could a Shanghai Cooperation Organization proclamation push Bitcoin prices even higher if it is seen as a tool to bring a multipolar monetary order into existence?

It is clear to see that the price of Bitcoin and other cryptocurrencies are inherently affected by events happening halfway across the world. Events such as the anti-gold policied India Prime Minister Manmohan Singh being replaced by a pro-gold, pro-Bitcoin PM could open the door for millions of Indians to start holding Bitcoin or other cryptocurrencies en masse.

We’ve seen the China effect on Bitcoin through their government authorizing Bitcoin news specials on China state television. India similarly currently creates a downward pressure on Bitcoin due to its anti-gold, and possibly anti-Bitcoin stance. Were this stance to change in May 2013 and India’s mulling regulators implemented a regulatory framework that does not hinder Bitcoin and/or other cryptocurrencies development, we would see a dramatic rise in price from India’s 2014 successor to PM Manmohan Singh.

These are just an example of events that could happen across the world. Major events coming from any country in the world can have dramatic effects upon Bitcoin’s fundamentals. Traditional fundamental analysis for traditional securities and real estate markets need to be reassessed. The new landscape is a global market backdrop with little to no resistance for capital to flow from country to country and similarly to FOREX, this market is open 24 hours a day, 7 days a week. This is an example of the kinds of major events that could happen halfway across the world yet have an immediate effect at home- and not be seen by using traditional fundamental analysis. Welcome to markets without borders.

By Keith Hilden

Keith Hilden holds a degree in Economic Crime Investigation and has CFE training. He is an Asia Pacific markets and Cyber Security Researcher for geopolitical consultancy Wikistrat, and researches frontier markets in developing countries and digital currencies on Squawkonomics.

Squawkonomics offers frontier market research in the areas of due diligence, market entry strategy, compliance, and custom tailored solutions. Contact us at for more information.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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