The price of the British pound has recently collapsed, causing uncertainty among many investors, and a number of them seem to have opted for Bitcoin (BTC) as a safe haven. On 26 September in particular, trading volumes in the GBP/BTC pair literally exploded. What does this mean, and will it happen again on a larger scale?
British pound fell to all-time low
Market conditions have had a particularly heavy impact on the British pound, which faces significant medium-term volatility risks and fell to an all-time low last week: in 15 days, the pound fell by 9%.
The GBP/USD exchange rate also reached its lowest peak on 26 September, at $1.0350 in the Asian session, recalling the brief crash of 1985. For reference, over the past 40 years, the average value of the GBP has only varied between $1.50 and $2.00.
GBP/USD price from 1982 to today
The new British Prime Minister, Liz Truss, will therefore have to face many market uncertainties and reassure her compatriots, although the latter no longer seem to have confidence in the measures taken by their government, as Fiona Cincotta, analyst at City Index, pointed out:
The market reaction shows that investors have lost confidence in the government’s approach, creating a level of volatility that puts the pound on par with some emerging market pairs.
As a result, a section of the UK public is looking for an alternative currency, and it seems that Bitcoin (BTC) has emerged as a leading choice. Indeed, as James Butterfill, Director of Research at CoinShares, pointed out, GBP/BTC trading volumes have literally exploded.
GBP/BTC trading volumes in dollars
This is surprising news, as the choice of this asset contrasts with gold, a metal recognised as the benchmark for safe-haven investments, which has seen a significant drop in interest from investors, as one analyst at Messari pointed out:
“Solid silver in gold” depreciated as the euro sold off on 13 September and the pound fell on 26 September. “
Compared to the previous 30 days, trading volumes in the GBP/BTC pair have seen an increase of around 878.11%. When compared to the previous year, this is a colossal increase of 1,431.76%.
In fact, on the day itself, the volume processed exceeded $881 million, whereas the average for the last two years has been around $70 million.
Beyond Bitcoin’s store of value
It is worth noting that the sharpness with which the pound fell was unexpected and unusual, creating arbitrage opportunities and price differences between exchanges. For example, we can see a spike in trading volume at the time when the BTC/GBP pair’s discount was the highest:
Arbitrage opportunities (top) compared to recorded trading volumes (bottom)
However, this explanation only explains a marginal part of the trading volumes, as Messari’s report points out:
“As these individuals in the UK and EU see the value of their currency plummet, they are effectively selling the pound and euro for Bitcoins. If this was just a move to capture volatility, we would have seen similar spikes in May 2021 and certainly in March 2020. “
In sum, investors have massively dumped their sterling and historical stores of value in favour of Bitcoin. However, Bitcoin may not become a benchmark store of value for at least a few years, as it still has a lot of work to do for wider adoption. But this could be the first domino to fall in that direction.
What’s next?
While the US dollar continues to prove its supremacy, as evidenced by the DXY index, the UK and European markets are more uncertain than ever before, particularly due to rising inflation and energy prices, which of course have to be seen in the context of the recently escalated Russian-Ukrainian conflict.
Indeed, as The Block’s correlation matrix proves, Bitcoin and Ether (ETH) are intrinsically linked to the evolution of financial markets. A correlation of 1 means a very strong relationship between the prices concerned, a correlation of 0 means no relationship between 2 prices, and finally a correlation of -1 means an almost opposite evolution.
As the table below shows, the 2 largest cryptocurrencies on the market are highly correlated to the main global financial market indices.
Correlations between Bitcoin, Ether and major market indices
For the time being, the pound has recovered thanks to an intervention by the Bank of England, which had to buy in the bond market, which had a short-term bearish effect, but which finally restored confidence – momentarily – to investors.
According to Kristalina Georgieva, the head of the International Monetary Fund (IMF), the Bank of England reacted “quickly and very appropriately”, in contrast to the IMF’s scathing judgement of the first plan proposed by Liz Truss’s government on 23 September, which included a $172 billion tax cut for the richest over the next two years, an idea that has since been abandoned.
In any case, the next few months should prove whether Bitcoin will find interest as a store of value among investors, given the current state of the international financial market, which is also facing the risks of a Credit Suisse bankruptcy.
