This post was most recently updated on July 13th, 2020
The impact of the COVID-19 pandemic on the world as a whole has been nothing less than disastrous. The FX industry is no exception here as the crisis has already resulted in the fall of forex reserves by over $5.3 billion. Sadly, that’s not the end of problems for FX traders. However, this period of extremely high volatility is also an opportunity. At least, this definitely should have been an opportunity for crypto to show off its power as a hedge against unstable markets. And yet, so far the results are the complete opposite.
High Volatility and the FX Industry: What’s Going on There?
The period of crisis always leads to a period of high volatility in the forex industry. This is a result of the fact that many governments manipulate fiat currencies to prevent the impending implosion of economies. The lack of stability is definitely dangerous, but it’s also a period that can be extremely lucrative for some.
In fact, the FX industry now has incredibly robust trading conditions. And someone who is smart, fast, and using the services of an excellent broker, can not only weather down this storm. It’s quite possible to turn this time of economic upheaval in your favor even for those who need to learn forex trading step by step.
Many FX brokers are doing exactly that. The rise in the interest of using fintech services, in particular, is one of the top reasons for their rapid growth. However, while some brokers are riding an all-time high in these conditions, others have not been as lucky. Alpha FX is struggling because some of its clients cancelled their forward contracts. The word out there is that the broker’s top client currently owes Alpha FX about £30.2 million, and it’s not the only one. This situation is similar for a number of other FX brokers who were either plain unlucky or not savvy enough to make the most of the situation.
The upheaval among FX brokers is more proof of the fact that no one is immune to high volatility conditions. And because many of these companies present themselves as bitcoin deposit brokers as well, their instability impacts the position of crypto as a whole.
Crypto as an Instrument for Hedging: Expectations and Reality
One of the main “selling points” of cryptocurrency was the prospect of using it as a hedging tool against unstable fiat currencies. After all, because of the limited number of coins that can exist, there is no way to manipulate them the same way that central banks do with currency.
The thing that’s happening now in many countries, and will continue to happen, is that banks are releasing more cash. This type of manipulation literally cannot happen to crypto. Supposedly, this should protect digital currency from the adverse effects of inflation. Moreover, this should make it the kind of stable asset that can remain stable and protect your fortune through an economic crisis.
However, as bitcoin has proven, it’s not at all reliable as a hedge against the unstable market. In fact, despite the rise of its price since its plunge below $5,000 in March, bitcoin is anything but reliable. And it’s unarguably the best bet as a crypto hedge.
The problems with crypto are many, the foremost is the fact that it does not perform as a hedge should. It does not remain stable in the face of market turmoil. And while volatility is normal for the crypto industry, it’s exactly what makes it unsuitable as a hedge.
The proof of this is the fact that when the stock market plunged due to the COVID-19 pandemic, so did bitcoin. This shouldn’t have happened, but it did. Therefore, putting one’s fortune on the hope that this wouldn’t happen again is a tremendous risk.
Why Is Crypto Failing Despite Seemingly Robust Conditions for Growth?
It’s true that millions of businesses suffered because of the pandemic. However, one industry definitely got a chance to rise because of it. The demand for digital payments has skyrocketed.
Obviously, this should have pushed cryptocurrency to an all-time high. But the situation is the opposite.
The problem is that the is neither trust nor infrastructure for crypto to truly come into its own. There is no doubt that there is potential for crypto to, essentially, replace fiat currencies. Using it is indeed faster and safer, especially when you can’t use cash. But there are very few opportunities to actually do that.
Cryptocurrency is not yet widespread enough to be accepted by a wide range of vendors. In fact, the majority of retailers do not accept it at all or under very limited conditions. Therefore, even the people who own coins cannot use them to make essential payments. Without this ability, cryptocurrency is all but useless as a means of digital payment. And the fact that it’s not used as a currency makes it more volatile, which further reduces its usefulness as a hedge.
All things considered, cryptocurrency is now in a position where its potential cannot be realized. There simply isn’t enough of an established digital network to make it possible. However, this pandemic has shown that such a network is necessary. It might become the push needed to take crypto to the next level.
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