Fiat currency loses popular support, multiple factors make Bitcoin the 'grey swan' of 2017

A recent article published by Dagens Næringsliv news network discussed the possible "grey swans" that may occur in the financial markets in 2017 ^[1] . The article was compiled by Nomura Holdings, a well-known Japanese investment bank. Among them, the "digital currency breakthrough" was listed in the article, because people generally lost confidence in legal currency.

With markets reeling from the unexpected Brexit and the election of Donald Trump, Bitcoin and other cryptocurrencies have the potential to upend not only traditional assets but also the way investors invest.

This is already happening in some countries in Europe, and others may soon follow suit. Low interest rates and yields will not only cause investors to look elsewhere for more attractive returns, but everyday consumers will also look for currencies that will appreciate rather than stagnate as a way to preserve value.

The Nomura team said in a new report:

“It looks like we are on the threshold of decentralized currency adoption, where new payment systems will replace paper and coin circulation. There have been cases in the past where people have lost confidence in the value of money and alternative forms of payment have risen.”

According to Investopedia, a gray swan is "an event that is somewhat foreseeable but is considered unlikely to occur and, if it occurs, would have a significant impact on the safety or health of the entire market. A gray swan event is different from a black swan event, the total impact of which is difficult to predict. Although it is possible to determine the nature and potential impact of such an event, it is very difficult to determine the total impact with precision."

Other 2017 "grey swan" events on the list include: a surge in US productivity (which has stagnated in 2016), a floating RMB price, further reforms in the European Union, capital controls in Asia, and the risk of hyperinflation in Japan .

Historically, Asian influence has been a major catalyst for the price action of Bitcoin and other cryptocurrencies. If capital controls were implemented in Asia, inflation in Japan, or a devaluation of the yuan were to occur, this would set off a domino effect that would make it more likely that cryptocurrencies would gain mainstream status.

Currently, most of the Bitcoin trading volume comes from China, and further fluctuations in the RMB will only increase Bitcoin trading volume. As in India, when people lose confidence in the government's fiat currency, alternative currencies tend to appreciate. In addition, China's capital controls on domestic and foreign liquidity, allowing the RMB to fluctuate based on market demand, will further encourage Chinese investors to turn to Bitcoin.

The Japanese Prime Minister recently set a target of increasing inflation to 2%. With the current inflation rate at 0.1%, this sudden surge could cause investors to move funds from traditional assets to alternative currencies like Bitcoin.

“The most likely way for prices to rise significantly in Japan would be in the price of the dollar, the yen and oil. Higher yen and higher oil prices would both create inflation.

Japan will also hold a prime ministerial election next year. Although according to current opinion polls, the current Prime Minister Shinzo Abe has a high approval rating, the four major opposition parties are considering jointly nominating a candidate, which may bring variables.

The market reaction before, during, and after Trump’s election is an indicator of how the Japanese market will respond to the same political uncertainty, so a surge in Bitcoin prices is not out of the question.

With the price of Bitcoin within reach of $800, will Bitcoin surpass this mark and enter four figures, becoming a gray swan? Either way, 2017 looks like a year full of potential for the entire cryptocurrency ecosystem.

Notes (↵ returns to text)

1. A ‘grey swan’ is an event that is somewhat foreseeable but is considered unlikely to occur, and if it does occur it will have a significant impact on the safety or health of the entire market. A grey swan event is different from a black swan event (whose overall impact is difficult to predict).↵