Fall of the pound sterling: Bitcoin (BTC) as a safe haven for the British?

The price of the British pound has recently collapsed, causing uncertainty for a large number of investors, and a number of them seem to have chosen Bitcoin (BTC) as a safe haven. On September 26 in particular, trading volumes on the GBP/BTC pair literally exploded. What does this mean, and will it happen on a larger scale?

The pound fell to an all-time low

The market conjunctions had a particularly heavy impact on the British pound, which faces significant medium-term volatility risks and which hit its all-time low last week: in 15 days, the pound fell by 9%.

The GBP/USD exchange rate also reached its lowest peak on September 26, when it posted $1.0350 in the Asian session, reminiscent of the brief crash of 1985. For information, over the past 40 years, the value of the GBP average only fluctuated between $1.50 and $2.

Price of the GBP/USD pair 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 trust the measures taken by their government, as highlighted by Fiona Cincotta, the analyst at City Index:

Market reactions show 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. 

Consequently, a portion of English citizens are looking to switch to another value, and it seems that Bitcoin (BTC) has emerged as a top choice. Indeed, as James Butterfill, the director of research at CoinShares, pointed out, GBP/BTC trading volumes literally exploded.

GBP/BTC trading volumes in dollars

Surprising information, the choice of this asset contrasts with gold, a metal yet recognized as the benchmark for secure investments, which has seen a significant drop in interest from investors, as noted by an analyst from Messari:

Solid silver in gold’ depreciated during the selloff of the euro on September 13 and the fall of the pound on September 26. 

Compared to the previous 30 days, trading volumes on the GBP/BTC pair increased by 878.11%. If we compare these data to those of the previous year, this constitutes a colossal increase of around 1,431.76%.

Indeed, on the same day, the volume processed exceeded 881 million dollars, while the average for the latter was around 70 million dollars over the last two years.

Beyond Bitcoin’s store of value

It should be noted, however, that the brutality with which the pound fell was unexpected and unusual, creating de facto arbitrage opportunities and price differences between the exchanges. For example, we can see a spike in trading volume when the BTC/GBP pair’s discount was at its steepest:

Arbitrage opportunities (top) compared to recorded trading volumes (bottom)

However, this explanation explains only a marginal part of trading volumes, as Messari’s report points out:

“As these individuals in the UK and EU see the value of their currency plummeting, they are effectively selling the Pound and Euro for Bitcoins. If this was just a trade to capture volatility, we would have seen similar spikes in May 2021 and certainly March 2020.”

In sum, investors have massively dumped their sterling and historical stores of value in favor of Bitcoin. However, Bitcoin may not become a benchmark store of value for at least a few years, with Bitcoin still having a lot of work to do for wider adoption. But this could be the first domino to fall in this direction.

And then?

While the US dollar continues to prove its supremacy, as demonstrated by the evolution of the DXY index, the British and European markets are more than ever in a phase of great uncertainty, in particular because of galloping inflation and the increase in energy, which is obviously to be compared with the Russian-Ukrainian conflict which has recently escalated again.

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 proves, the 2 largest cryptocurrencies on the market are highly correlated with the main global financial market indices.

Correlations between Bitcoin, Ether, and major market indices

For the time being, the course of the pound sterling has risen thanks to an intervention by the Bank of England, which had to make purchases on the bond market, which had a downward effect in the short term, but which ultimately able to restore confidence – temporarily – 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 scathing judgment of the IMF on the first plan proposed by the government of Liz Truss on September 23, which notably reported a tax cut for the richest over the next two years to the tune of 172 billion dollars, an idea since abandoned.

Either way, the next few months should prove to us whether Bitcoin will be able to find interest as a store of value among investors, given the current state of the international financial market, which also has to deal with risks. The bankruptcy of Credit Suisse.

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