Dollar strength causes Bitcoin weakness

GB Market Commentary 05/07/2022

by Marcus Sotiriou

Despite Bitcoin climbing back above the 2017 ATH yesterday, it failed to reclaim the level this morning as it dropped back below $20,000. The dollar has been showing strength over the past 6 months, which typically results in pain for most assets, and it has surged this morning. The dollar is currently at 20-year highs and is showing no signs of slowing down. This seems counter-intuitive when U.S. inflation is so high, but it shows how investors are seeking safety during the market uncertainty. When the dollar eventually reverses, this could be a signal that risk assets like crypto are due for some upside.

In the Bank of England’s financial stability report on Tuesday, the bank’s Financial Policy Committee (FPC) briefly addressed cryptocurrencies. The report noted that while crypto poses a less immediate risk it is nonetheless important to monitor, as several vulnerabilities have been exposed during the recent market downturn. The bank noted the following vulnerabilities:

"Liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls. Investor confidence in the ability of certain so-called 'stablecoins' to maintain their pegs was weakened significantly, particularly those with no or riskier backing assets and lower transparency."

Unfortunately, the UK’s financial watchdog (FCA) is well behind the curve. Just 33 crypto companies have been awarded licenses in the U.K. so far. The current regulatory direction of the U.K. puts the country at risk of falling behind the U.S., European Union, and other regions.

Last week, domestic watchdogs from the U.K. and U.S. participated in a meeting and acknowledged the importance of teaming up to strengthen regulatory outcomes for crypto whilst supporting innovation.

This is a step in the right direction, however, there’s a lot of work to be done if the U.K. wants to live up to the goal of becoming the ‘global hub’ for crypto.