FX Markets Shrink While Bitcoin Expands

Daily foreign exchange market volumes have shrunk for the first time in 15 years, according to the Bank for International Settlements (BIS). Banks are increasingly becoming worried as the BIS, which is owned by central banks, warns them of impending financial stability risks. On the other hand, the bitcoin price continues to rise, reaching its highest level in the last three years.

Also read: Bitcoin 2016: the Year of a Different Rise

The Bank for International Settlements Is Worried

The magnitude of foreign exchange trade shrinkage is alarming banking authorities.

The BIS is carefully analyzing the downsizing of FX markets. Sixty central banks comprise the BIS, representing 95 percent of the world GDP.

Specifically, the BIS indicates, “Global FX turnover fell to $5.1 trillion per day in April 2016, from $5.4 trillion in April 2013.” (See graph 1)

Graph 1

According to the BIS, the causes for the FX markets downsizing have been due to a variety of factors:

“The decline in trading by leveraged institutions and ‘fast money’ traders, and a reduction in risk appetite have contributed to a significant drop in spot market activity. More active trading of FX derivatives, largely for hedging purposes, has provided a partial offset. Many FX dealer banks have become less willing to warehouse risk and have been re-evaluating their prime brokerage business. At the same time, new technologically driven non-bank players have gained firmer footing as market-makers and liquidity providers.”

The Fiat Currency Exchange Market Is Downsizing

Financial District of London and the Tower Bridge

Financial District of London and the Tower Bridge

The implications of this phenomenon are already far-reaching. For example, the foreign exchange downsizing is affecting the City of London. London is one of the biggest foreign currency trading centers, where 37 percent of global currency trading occurs.

“The world’s foreign exchange markets have shrunk for the first time on record in a downturn that poses a big challenge for the City, the global leader in the buying and selling of currencies,” reports The Times.

Fiat Currencies’ Supply Crisis

shutterstock_369151262-1Fiat currencies are also suffering because of physical cash shortages.

In India, the economy is grinding to a halt because of the demonetization initiative that aims to void 86 percent of Indians’ cash.

Likewise, Venezuela is implementing a demonetization plan, which involves withdrawing from circulation the largest denominated-bill, the 100-bolivar notes. As a result, authorities now fear the smuggling of cash, forcing them to close their borders with Colombia and Brazil.

Moreover, the economic turmoil in Zimbabwe deepened further, following its Reserve Bank’s decision to impose cash withdrawal limits.

Bitcoin is Maturing and Gaining Momentum

shutterstock_197351204Bitcoin continues to gain strength as shown by its price. Indeed, bitcoin is moving closer and closer towards USD 800, while daily trading volumes are also increasing.

Also, bitcoin is gaining wider acceptance. For example, the mainstream media is starting to show it in a more positive light.

“Bitcoin is predicted to rise 165% to $2,000 in 2017, driven by Trump’s ‘spending binge’ and dollar rally,” says CNBC.

Reuters also reports on the spectacular rise of the cryptocurrency, pointing out that “bitcoin has climbed around 80 percent so far this year, far exceeding its 35 percent rise in 2015.”

Moreover, bitcoin’s value has steadily surpassed the price of gold by an impressive margin, during 2016. “The digital currency has more than doubled in value, while the yellow metal has gained 8.73 percent,” reports Forbes.

Today, the combination of an obsolete institution such as traditional banking and a three-thousand-year-old fiat monetary system are showing cracks all around. In contrast, bitcoin continues to strengthen and mature.

How do you think the shrinking of the foreign exchange market will affect Bitcoin? Let us know in the comments below.


Images courtesy of Shutterstock.


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