FX Viewpoint | Cryptocurrencies vs. FX | Article – HSBC VisionGo
- It may be tempting to think of cryptocurrencies and FX as similar instruments…
- …but they are markedly different in terms of infrastructure, market participants, volatility, for example
- More development in cryptocurrencies will be needed before any longstanding and durable relationships can begin to emerge
Cryptocurrencies and FX are very different markets, in terms of infrastructure and market participants
It has been a rollercoaster ride for cryptocurrencies over the past year and the focus is showing little sign of fading. Governments and central banks have shown heightened awareness of the growth of cryptocurrencies with their own digital initiatives – central bank digital currencies (CBDCs). It may be tempting to think of cryptocurrencies and exchange rates (FX) as similar instruments, but they are markedly different from each other. The latter not only has different market infrastructure, but also a much wider array of participants.
With the explosion of interest (and prices) in the cryptocurrency market, average daily trading volumes in cryptocurrencies now dwarf those in a number of major currencies at times (Chart 1). In certain periods, cryptocurrency volumes have even climbed above USD250bn per day, which has even exceeded the average daily turnover of some Asian currencies, such as the HKD. Thus, it is not difficult to fathom possible spill-over effects of cryptocurrencies into other markets.
Relationships between cryptocurrencies and FX are not stable, possibly because cryptocurrencies are extremely volatile, in our view
There may be some brief periods when cryptocurrencies appear to share a close relationship with other instruments such as FX and gold, but these relationships are weak and inconsistent, possibly due to the sheer volatility of cryptocurrencies, in our view. Chart 2 shows the magnitude of the difference of the 20-day historical volatility among Bitcoin (i.e., the most widely traded and largest of all cryptocurrencies), the US Dollar Index (DXY) and gold.
With more development in the cryptocurrency market, a closer relationship between FX and cryptocurrencies could grow over time
For more substantial relationships to develop between cryptocurrencies and FX, the former will need to change on a number of fronts, not least via an increase in the level of institutionalisation in cryptocurrencies and deeper market infrastructure, in our view. If this happens, then we may see evidence of stronger relationships emerging.
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This report is dated as at 11 June 2021.
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