For a while now, the steady increase in the price of coffee has been subject to worldwide discussions—and yet the tail end of November brought an unprecedented price surge with it.
It was during this period that the price of green arabica reached €6.5 per kilogram, despite dropping to €4.47 earlier this year. Experts now say that the volatility of coffee prices is starting to resemble the state of cryptocurrency.
“While the coffee and the bitcoin markets may seem to have nothing in common at first glance, what unites them is, in fact, volatility,” says Aurimas Vainauskas, the CEO of “Coffee Friend”, before adding that the incessant price fluctuations of the two reflect the overall dynamics of speculative markets.
Coffee plays an important role in the global financial market. In 2023, the global coffee market was estimated to be worth anywhere from 100 to 200 billion US dollars. The highest coffee price to date was recorded back in 1977 and amounted to €6.8 per kilogram. The beginning of the current increase can be traced back to 2023.
How Are the Two Markets Similar, and What Does That Mean for Traders and Investors?
Dynamics of Supply and Demand
Coffee prices are impacted greatly by changes in supply and demand. Countries that produce the most coffee—such as Brazil and Vietnam—play an absolutely crucial role here. Poor harvest, brought about by adverse weather conditions (drought or frost, for example), can lead to global coffee shortages and sudden price spikes. Conversely, larger harvests may overfill the market, and cause the coffee price to drop. Due to changes in consumption patterns or economic circumstances, demand can fluctuate as well, making the market even harder to predict.
The bitcoin market is just as susceptible to changing demand. Unlike coffee, the supply of bitcoin is limited and very much predictable: it is fixed at a maximum of 21 million coins. When it comes to demand though, it is prone to speculation, influenced as it is by the attitudes of the investors, institutional involvement, changes in regulation, and macroeconomic trends. As the demand increases, so does the price; and if enthusiasm is on the wane, the price follows suit.
Speculative Nature
Both markets are particularly attractive to speculators. This may result in further fluctuations caused by unforeseen events, changing attitudes, or short-term technical factors.
The speculators participating in the coffee market include hedge funds, institutional investors, and a variety of other players. Markets that trade in futures enable such speculators to bet on coffee prices, while traders often overestimate the accuracy of weather reports and the impact of geopolitics, which, again, increases volatility.
The bitcoin market is very similar: like in the case of coffee, the price of bitcoin often comes about as a result of general attitudes rather than intrinsic value. Social media posts and updated regulations can change the price of bitcoin radically in a matter of hours. Moreover, due to the relatively low market capital, individual transactions can also have a significant impact if they are large enough.
External Factors and Unforeseen Events
The coffee and bitcoin markets are both extremely sensitive to various external factors and unforeseen events.
The close connection between coffee prices and weather conditions has already been discussed. A single case of unexpected frost over in Brazil can destroy much of the global coffee harvest, resulting in a dramatic price surge. The same applies to political unrest or changes in export policy: such factors can disrupt the supply chain in coffee-growing countries, hence once again leading to fluctuations. “The global supply of arabica has been influenced by several extreme weather phenomena: in July 2021, frost destroyed a great deal of the harvest in Brazil, while Colombia was subjected to 13 months of constant rainfall. Not to mention Ethiopia, which has been suffering from droughts for the past five years,” notes the CEO of “Coffee Friend” Aurimas Vainauskas.
Similarly, the price of bitcoin is affected greatly by technological advancements (such as blockchain protocol upgrades) and other external factors, like the attitudes of local governments to mining or cryptocurrency exchanges. Unforeseen events may play a part too: these can include large cryptocurrency platforms collapsing or favourable regulation changes coming into effect, with the latter often resulting in huge price spikes.
Lack of Predictability
Due to the complex interplay of a variety of different factors, both coffee and bitcoin prices are extremely hard to predict.
When it comes to coffee, sudden changes in weather conditions, geopolitical risks, and the actions of speculators all contribute to the volatility of the market. For example, despite traders expecting a good harvest, a sudden drought or a pest outbreak can result in unforeseen market upheaval.
The bitcoin market is just as unpredictable: it may be affected by general attitudes, macroeconomic trends, and regulation changes. Advanced tools of technical analysis may not be of much help either, so huge profits and massive losses are both equally likely.
Volatility as Both Opportunity and Risk
The volatility of the two markets creates both valuable opportunities and considerable risks.
Producers and buyers can shield themselves from sudden price changes with the help of futures. Speculators, on the other hand, profit from such volatility, and often use price fluctuations to their favour.
Bitcoin fluctuations attract those looking for high returns, yet long-term investors tend to steer clear of the market. On their part, to reduce risk or profit from price volatility, institutions frequently resort to financial derivatives, like options or futures.
While coffee and bitcoin may seem to be worlds apart, the common feature of price volatility reveals the similarities between the two markets. Both of them are sensitive to changing supply and demand, market speculation, and external shocks. “Whether it is the aroma of a freshly brewed cup of coffee or the digital blockchain revolution, both of these can serve to illustrate just how unpredictable the financial system can be,” concludes A. Vainauskas.
Read more:
The Volatility of the Coffee Market Is Starting to Resemble Cryptocurrency Fluctuations