The Brexit vote is an extraordinary opportunity to make a huge sum of money. This also opens up the possibility of a huge loss if you bet on the wrong outcome though. At least that’s what you would expect the risk/reward ratio to be in an efficient market.
There is a market, though, with significant Brexit exposure and a strongly lopsided risk/reward ratio. This market is young and so many of the inefficiencies have yet to be weeded out – making it easier to predict future price action. Specifically, the market is strongly momentum based.
This market is the Bitcoin (BTC) market. Considered to be a possible replacement for gold in the global economy, Bitcoin and gold prices are strongly correlated with both being seen as “safe haven” investments. Of course, the possibility of a Brexit has sent both higher and a “Leave” vote would lead to significantly higher re-pricing.
Bitcoin, being a substantially younger and more inefficient market than gold, has a special characteristic that will limit the downside should the “Remain” vote win. The Bitcoin market trades in large part on sentiment. Further, this sentiment is famously hard to change. Over the years, the price has risen in anticipation of future global instability. When this anticipation came to naught, though, prices just kept rising. The Bitcoin markets are based on sentiment, and that sentiment has proven extremely resilient in the past. As you can see above, the Bitcoin price tends to follow long-lived, large swings. These trends kept on going despite significant news that normally would indicate that it had come to an end.
Luckily, the chart is currently trending up. This has only been exacerbated by Brexit polls recently showing that a Leave vote is a real possibility. From previous experience, I would expect either the price to jump 30+% in the days after a Leave vote, or slowly bleed down about 10% in the week after a Remain vote. The upward momentum will quickly cap risk on this trade, though. On the other hand, the return could easily exceed 30% if euphoria overtakes the market – a not uncommon situation.
In fact, Bitcoin markets are acting euphoric at this very moment. Over the past three weeks, prices of the cryptocurrency have risen from about $450 to $700. It is believed by many that this rise was the result of the upcoming “block halving.”
Bitcoin is based on a distributed peer-to-peer technology called the Blockchain. This system secures Bitcoin transactions by forcing computers, called “miners,” to solve computationally complex problems which prove that each individual bitcoin can only be sent from one account to one other account; preventing “double-spending.”
Each transaction is added to a “block,” which can then be verified to speed up transactions. It is usually only safe to believe that a bitcoin is safe from being double-spent, in which case a vendor may suddenly see the bitcoin disappear from their account into another, is to wait for the block that carries the transaction to be verified by the computer miners. To compensate for their computer power, miners receive bitcoins each time they are the first to solve one of the problems.
Block halving occurs when the reward for securing each block is cut in half. This will be done periodically throughout the first 100-200 years of Bitcoin to allow for the cryptocurrency to gradually grow its supply. But miners can incur significant costs in building and running the powerful computers that power the Blockchain. The amount of bitcoin that they are rewarded with is important.
When the miners’ reward is cut, there could suddenly be a disequilibrium in the market. Miners tend to sell their earned bitcoin to lock in profits and pay for maintenance and expansion. This provides a steady supply of new bitcoin and tends to put downward pressure on the price. When rewards are cut in half, this downward pressure will quickly lose much of its strength. Another cryptocurrency can provide evidence that this can lead to a surging price in the time before the halving.
Based off of Bitcoin, Litecoin (LTC) had a block halving in 2015. Just prior to the halving, the price of a single litecoin skyrocketed more the 300% from below $1.50 to above $5.
Could Bitcoin see a similar rise? I don’t know but the cards are certainly in favor of further upside potential.
Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.