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The year 2009 was marked both by the genesis of Bitcoin and by the start of an unprecedented bullish stock market, which has continued almost uninterrupted since. However, the whispers of an accident are still present and the noise has recently become louder.
Amid COVID-19’s refusal to go away, actions continue to climb, backed by unprecedented government support. But now that quantitative easing policies are no longer being implemented, is the mention of a stock market crash justified?
If so, it could bring some unfortunate news for Bitcoin (BTC): it could be argued that there are signs of a strong correlation between Bitcoin and stocks. So what can happen to crypto if the bottom falls in US stocks?
What is the probability of a crash?
By removing crypto from the picture, the growing speculation that a crash is imminent has some merit. In June, the inflation rate in the United States was significantly higher than expected. In the meantime, the government has continued to issue bonds and to take on debt to the point that we are now talking about breeding the debt ceiling.
The rationale for this is, of course, the ongoing pandemic relief effort. But the government is pumping money into the economy when other signs, such as U.S. stock prices, indicate relief is not needed. U.S. real estate markets are also booming, while the Federal Reserve has previously expressed concerns that investors are becoming increasingly reckless, SEO appetite for meme stocks and cryptocurrencies, for example.
All that money pumped into the economy has to dry up at some point, leading to justifiable speculation that a crash could be the inevitable consequence. Michäel van de Poppe, Cointelegraph columnist and full-time trader, believes that “expectations of a strong correction are justified”, adding:
“The chances of a [stock market] the collapse is escalating day by day as the markets are overheating sharply – not just in stocks, but real estate markets are showing similar signals. […] The market is entering a bubble phase, created by an insane amount of impressions from the Fed, through which the middle class is squeezed. “
Toya Zhang, marketing manager at AAX Exchange, agrees a crash is imminent, but urges caution when trying to predict when. “Considering the magnitude of the stock market declines and the fact that the market is somewhat overvalued, I think there is a reasonably high probability of a stock market downturn,” Zhang said. “No one can say exactly when this will happen, however. “
Correlated for now, but for how long?
One question is, to what extent were the recent recoveries in the crypto market and the stock market related in March 2020? Most equity analysts were surprised by the speed and fury of the recovery. However, the fact that the S&P 500 is heavily biased towards tech companies explains a lot given how quickly the world has shifted to digital.
But in the crypto space, the story was somewhat different. With no other explanation for the crypto market crash, most people were surprised that Bitcoin behaved in a way that appeared to mirror stocks. After all, the assumption has always been that BTC is uncorrelated and would act as a hedge against more traditional types of assets such as stocks and precious metals.
Based on the most recent experience, history suggests that if the stock markets were to collapse in 2021, the crypto markets would follow suit. An alternate scenario would be for the stock market to collapse and investors to immediately transfer funds to crypto. Even without the March 2020 pullback, that seems unlikely. Crypto still has a reputation for being a notoriously volatile asset, which has not been tested as a safe haven in the event of a financial crisis.
However, what happens after the crash could lead to a more interesting discussion about market correlations. What if, this time around, the stock markets did not go into automatic recovery mode? This scenario is a reasonable assumption, given that the pandemic effect is now built into the markets and there is much less uncertainty than in March of last year.
What would BTC do in the event of a prolonged period of stagnation or even decline in US stocks? The most powerful premise of the “Bitcoin is not correlated to stocks” argument is that Bitcoin has its own market cycles – related to halving – which dictate its price movements in a much more convincing way than all external economic forces. Looking at it in this light, one might assume that whether or not the stock markets recovered after March 2020, BTC would have hit new all-time highs anyway.
But even against the still reliable stock-flow BTC price model developed by PlanB, prices have struggled to stay within limits lately. Nonetheless, the recent rally means the model has held up, and prices currently show significant promise of a lasting recovery. So even if the turmoil in the stock markets were to cause chaos in crypto, there is data that predicts that BTC market cycles may eventually regain their seemingly bullet-proof price control.
A struggle of opposing forces
If there is a short-term crash, there is so far no evidence to suggest that the price of Bitcoin will fail to keep up. Assuming that happens in 2021, what happens next could become a struggle between Bitcoin’s market cycles and the effects of a prolonged economic downturn.
However, assuming that the effect of the former could outweigh even the latter, this would make Bitcoin attractive as a safe haven asset (in the absence of many other alternatives). If everything else goes down, BTC need only maintain its value to tempt investors. But suppose Bitcoin’s halving cycle proves to be able to completely negate the effect of a prolonged market downturn. In this case, BTC could become one of the only assets to offer the possibility of large returns during a downturn.
Sean Rach, co-founder of nonprofit blockchain services company hi, believes crypto will ultimately become an attractive asset for alpha researchers. “Growing dissatisfaction with the financial system, as well as the history of all fiat currencies, means that the search for alternatives remains a positive factor for the growth of crypto markets,” said Rach. Meanwhile, Mati Greenspan, founder and CEO of consulting firm Quantum Economics, told Cointelegraph:
“In the short history of the crypto asset class, the token market has moved largely in line with other risky assets like stocks and commodities. They tend to react particularly well to the printing of money by the central bank. Still, there is much more room for the growth of crypto as it is largely in the early stages of development. So even though we see stocks peaking, I don’t think it’s going to have a lasting impact on digital assets. “
Ultimately, it’s worth remembering that accidents are short-term events. They can be painful, but the longer term outlook is where things get more interesting. Suppose stocks find themselves in a sustained bear market while the macroeconomics recover. In this case, it could easily turn into an opportunity for investors to get a good deal once the crypto hits its bottom. As such, while a short-term correlation can be difficult to avoid, there is every chance that crypto can overthrow markets in the long term.
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