Is Brexit a chance for crypto to gain a stronger foothold in Europe?

Uncertainties have been clouding financial markets as the US-China trade war intensified, and so far, there’s no end in sight for this long-standing trade dispute between the two biggest economies in the world. Unfortunately, markets never run out of uncertainties, and Brexit is certainly one of them. With Boris Johnson took the helm as Prime Minister, the possibility of a No-deal Brexit is higher than ever. How crypto investors should play this? What implications could have in terms of price actions and crypto development?

What is the Latest?

Source: BBC

It may seem relatively quiet when it comes to Brexit developments and updates, however, this is more like the calm before the storm. The UK parliament will return from the summer recess in the second week of September, and PM Johnson is expected to have a series of intense debates with lawmakers trying to avoid a no-deal Brexit. The first clash is likely on September 9th which MPs are scheduled to discuss the progress report on power-sharing in Northern Ireland. Meanwhile, the Labour leader Jeremy Corbyn could call for a vote of no confidence against PM Johnson as early as September 3rd.

As Johnson took the helm as Prime Minister, the chance of the UK leaving the EU without a deal is getting more like by day. In a report, the UK-based think tank Institute for Government believes that the chance of the UK departing the EU with a deal is very slim, even a vote of no confidence would probably not block a no-deal exit either.

So, what will happen after a no-deal Brexit delivered? Although unlikely, what happens if the Brexit deal changed?

The Challenges

It’s still unclear the scale of impact that a no-deal Brexit could bring to the UK and global economy. However, the latest statement from the Bank of England could provide a clue. Despite keeping the benchmark interest rates unchanged, the BoE highlighted the risk of the slowing of the underlying growth due to Brexit, saying the growth “appears to have slowed since 2018 to a rate below potential, reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade.“ In addition, the MPC also said, “evidence from companies, up to the middle of July, suggests that uncertainty over the United Kingdom’s future trading relationship with the European Union has become more entrenched.”

“Evidence from companies, up to the middle of July, suggests that uncertainty over the United Kingdom’s future trading relationship with the European Union has become more entrenched.” — Bank of England

Economic data has been telling the same story. The UK manufacturing PMI remained at 48 in July, the lowest reading in 6.5 years. The CBI Business Optimism Indicator dropped 19 points to -32 in 3Q this year, that’s the weakest quarterly number since 3Q16, and Brexit related uncertainties played a major part in it.

Source: IHS Markit; tradingeconomics.com
Source: CBI UK; tradingeconomics.com

Trade is one of the major concerns of the markets because the EU is the UK’s biggest trading partner. Data shows that almost half of the UK exported goods and services went to EU countries. While it is too early to determine what’s the UK-EU trade landscape will be like in the post-Brexit era, but in general, markets are expected the cost of cross-border trade for UK businesses would increase, and eventually could bring negative impact to the financial markets.

Cross-asset Check

Although the final Brexit outcome is still largely a variable, yet, markets seem to have partially priced-in the potential negative impact of a no-deal scenario. In our previous publication “Bitcoin and a Chaotic World”, we’ve reviewed the cross-asset performances during the beginning stage of Brexit and the rationale behind it, and clearly, safe-haven assets like gold outperformed the pound and the FTSE in that timeframe. When we fast forward the timeline to late 2018, that trend has become more noticeable, especially after the delay of the Meaningful vote.

Looking at where we are now, GBPUSD is at a multi-year low, 10Y-gilt yields slumped to record low of below 0.5%. Of course, we can layer the US-China trade war worries on that, however, Brexit has been playing a key part in it, and we expected Brexit will continue to bring impact to major UK-related assets in the near-term.

Besides gold, bitcoin’s eye-catching performance is too hard to ignore. Whether bitcoin is a digital gold or not, those heated debates seem not able to stop the cryptocurrency bulls. Undoubtedly, bitcoin shares not all but some of the qualities and characteristics of gold, such as store of value. In a world where full of uncertainties and markets were addicted to cheap money and low-interest rates, bitcoin is particularly attractive to some of the investors.

Source: tradingview.com

Brexit Impact on Crypto

Bitcoin has surged over 1000% since the Brexit referendum result announcement, and it’s expected to remain in focus as the UK parliament is set to resume in about two weeks. A recent survey shows that crypto analysts believe that Brexit will bring a positive impact on broader crypto prices.

Source: Cindicator Analytics

study from Cindicator Analytics published on March 28th, 2019 shows that 63% of the surveyed analysts think that Brexit will continue to be one of the major sources of risks and uncertainties in the markets, and crypto could benefit from that sentiment. More than 73% of analysts said they would invest in cryptocurrency in their portfolio when risk appetite is low in the markets. Among them, large-cap crypto such as BTC, ETH, and LTC would be their preferences.

Conversely, about 19% of the analysts believe that Brexit will not have any meaningful impact on crypto. Another 19% think Brexit will bring crypto somewhat negative impact.

The study also finds that more than 51% of specialists see crypto adoption has been rising and able to act as a hedge under an uncertain economic situation. On the other hand, 15.6% believe crypto adoption remains low and still too risky to use as a hedge in a portfolio.

However, many of the predictors believe that there could be faster adoption of blockchain technology in the UK, as it would increasingly be used in cross-border trade.

Conclusion

Growing geopolitical tensions have made the word “hedge” the latest buzzword in the financial markets. Whether bitcoin or more broadly crypto, is a hedging tool or not, its correlations with traditional assets are getting closer by day. The development of Brexit is certainly a major theme in 4Q, volatility is expected to increase as Brexit will soon unfold under the lead of PM Johnson. Crypto traders and traditional money managers could take advantage of these volatile conditions to ride the markets.

Moreover, a post-Brexit UK is also presenting a chance to reshape the regulatory landscape, as the country will no longer bound to the rules of the EU. The UK is expected to take a more proactive approach in embracing blockchain innovation, which could also result in higher acceptance of crypto assets.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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