The Impact of Political Endorsements on Cryptocurrency Valuations and Forex Markets

Political
endorsements have always had an impact on financial markets especially in
recent years. For digital assets, the impact sends shock waves throughout the
industry since it is not yet fully matured, as such, any potential policy
change could have a ripple effect. For forex markets, investors on the outside
are constantly looking to see what other global players are doing in their
country to gauge how any policies could affect the country’s political powers
or financial strength. Imagine for example you invest in a foreign currency and
suddenly the country is at war with another country. The political stability of
that country is at risk and as such you and all other investors will most
likely pull out your investment just to be safe.

How Political Endorsements Affect Cryptocurrency Prices

Sentiments
largely move cryptocurrency valuations, that is, attitudes or general feelings
investors have toward an asset. For example, if investors are optimistic, they
expect that prices will rise and so will valuation. This is a bullish
sentiment. On the other hand, if they are pessimistic, they expect prices to
fall, which usually means they dump their assets. This is a bearish sentiment.
So when a politician endorses a cryptocurrency either through a public
statement or with a policy proposal, it is like having the government’s
backing, which often leads to a bullish sentiment. Similarly, if they criticize
a digital asset, it triggers a massive sell-off.

Meme
coins, for example, owe their success largely to social media hype and
political endorsements from people like Elon Musk. If Musk tweets about a meme
coin, it could make it to the list of top meme coins
in a matter of hours. According to Bitcoinist, the best meme coins to invest in
right now include Catslap and Mind of Pepe.

Perhaps
the most popular endorsement in recent history came from the president of El
Salvador in 2021 when he led the Bitcoin Law bill to be passed in the country.
The bill made Bitcoin a legal tender, meaning it can be used to carry out
formal transactions and has the government’s backing. The value of Bitcoin went
from around $31,000 in June 2021 when the bill was passed to around $52,000 in
September 2021 when it was officially adopted. This is the power of political
endorsements on cryptocurrency valuation.

How Political Endorsements Affect Forex Markets

The
forex market is mostly affected by interest rates and monetary policies.
Political endorsements tend to only cause short-term price movements in
exchange rates. For example, if a senator proposes a bill that strengthens
trade deals that will lead to economic growth for the US, it will positively
impact the position of the US dollar in forex markets. Conversely, the same
applies if a policy is introduced that could weaken the local currency.

If you
look at a country like Nigeria, 10 years ago the exchange rate was about 1 USD
= 204 NGN. However, due to the country’s monetary policies that have led to
rising inflation, the Naira has weakened and today the average exchange rate
is about 1,528 NGN to a dollar.

Another
case study to consider is the case of Brexit and the British Pound (GBP). When
key government figures started endorsing the movement, it created a lot of
uncertainty in the forex markets resulting in a sharp decline in GBP value.
Again, it could be something as simple as feelings (sentiments) that could make
a value go up or down.

Conclusion

Every
day we see political figures make statements about one thing or another. When
cryptocurrency advocates come into positions of influence or make endorsements
about anything that affects the strength of the local currency, it will have a ripple effect across the markets. Generally, financial markets are highly sensitive to
announcements and policies. As an investor, you should try to pay attention to
current affairs as much as possible so you are not caught off guard. And you
should develop strategies to use in case you find yourself in an uncertain
position.

This article was written by FL Contributors at www.forexlive.com.