The year 2009 was marked by both the genesis of Bitcoin and the United States stock market that initiated an unprecedented bull market., one that has continued almost uninterrupted ever since. However, the murmurs of a fall are always present and the noise has gotten louder recently.
Against the backdrop of COVID-19 refusing to go away, stocks continue to climb, backed by an unprecedented amount of government support. But now that quantitative easing policies are no longer being implemented, is it justifiable to talk about a stock market crash?
If so, this could bring 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 cryptocurrencies if the floor falls outside of US stocks?
How likely is a fall?
Taking cryptocurrencies out of 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. Meanwhile, the government continued to issue bonds and accumulate more debt to the point where there is now talk of raising 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 signals, such as US stock prices, indicate that relief is not necessary. The US real estate markets are also on the rise, while the Federal Reserve has already raised concerns that investors are becoming increasingly reckless, citing the appetite for meme stocks and cryptocurrencies as illustrative cases.
All of this money entering the economy has to run out at some point, leading to justified speculation that a collapse could be the inevitable consequence. Michäel van de Poppe, a Cointelegraph columnist and full-time trader, believes that “expectations of a strong correction are justified,” adding:
“The chances of a collapse [del mercado de valores] They are increasing day by day as markets are overheating strongly, not just in stocks, but real estate markets are showing similar signs. […] The market is entering a bubble phase, created by an enormous amount of impressions from the Fed, through which the middle class is being affected ”.
Toya Zhang, marketing manager at AAX Exchange, agrees that a crash is coming, but urges caution when trying to predict the timing. “Given how common stock market crashes are and the fact that the market is somewhat overvalued, I think there is a reasonably high probability of a stock market downturn,” Zhang said. “However, no one can say exactly when it will happen.”
Correlated for now, but for how long?
One question is: how linked were the recent market rallies in both crypto and the stock market in March 2020? Most stock market analysts were surprised by how fast and furious the recovery was. However, the fact that the S&P 500 leans heavily towards tech companies explains a lot, given how quickly the world went digital.
But in the crypto space, the narrative was somewhat different. In the absence of any other explanation for the cryptocurrency market crash, most people were surprised that Bitcoin had behaved in a way that seemed to mirror stocks. After all, it had always been assumed that BTC was uncorrelated and would act as a hedge against more traditional asset types such as stocks and precious metals.
Based on the most recent experience, history would suggest that if equity markets collapsed in 2021, cryptocurrency markets would follow. An alternative scenario would be for the stock market to crash and investors immediately move funds to cryptocurrencies. Even without the benefit of the March 2020 hindsight, this seems unlikely. Cryptocurrencies still have a reputation for being a notoriously volatile asset, one that has not been proven as a safe haven in a financial crisis.
However, what happens after the crash could spark a more interesting discussion about market correlations. What if the stock markets don’t go into automatic recovery mode this time? This scenario is a reasonable assumption, given that the effect of the pandemic is now priced in the markets and there is much less uncertainty than in March last year.
What would BTC do in the event of an extended flat or even bearish period in US stocks? The most powerful premise for the “Bitcoin is not correlated to stocks” argument is that Bitcoin has its own market cycles, tied to halving, that dictate its price movements in a much more compelling way than any external economic force. Looking at it through this lens, one could speculate that regardless of whether the stock markets had rallied after March 2020, BTC would have hit new all-time highs anyway.
But even against the always reliable stock-to-flow BTC pricing model developed Per PlanB, prices have been struggling to stay within limits as of late. But nevertheless, the recent rally means the model has held up and prices now show significant promise of a sustainable recovery. So even if the tumult in the stock markets causes chaos in cryptocurrencies, there is data that predicts that the BTC market cycles could finally resume their seemingly tight price control.
A struggle of opposing forces
If there is a short-term collapse, there is no evidence so far to suggest that the price of Bitcoin will not hold. Assuming this happens in 2021, what will happen next could turn into a struggle between Bitcoin market cycles and the effects of a prolonged economic downturn.
However, assuming that the effect of the former can outweigh the latter even by an increase, it would make Bitcoin attractive as a safe-haven asset (in the absence of many other alternatives). If everything else is going down BTC only needs to maintain its value to tempt investors. But suppose that the Bitcoin halving cycle proves capable of completely nullifying the effect of a prolonged market downturn. In that case, BTC could become one of the only assets that offers the opportunity to make significant profits during a recession.
Sean Rach, co-founder of the non-profit blockchain services company hi, believes that cryptocurrencies will ultimately become an attractive asset for alpha seekers. “The growing dissatisfaction with the financial system, as well as the history of all fiat currencies, means that the search for alternatives continues to be a positive factor for the growth of the cryptocurrency markets,” said Rach. Meanwhile, Mati Greenspan, founder and CEO of the 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 risk assets such as stocks and commodities. They tend to react especially well to central bank money printing. Still, there is much more room for the growth of cryptocurrencies, as it is largely in the early development phase. So even if we see stocks peak, I don’t think it will have a sustained impact on digital assets. “
Ultimately, it is worth remembering that accidents are short-term events. They can be painful, but the longer-term perspective is where things get the most interesting. Suppose stocks end up in a sustained bear market while the macroeconomy recovers. In that case, it could easily become an opportunity for investors to get a bargain once the cryptocurrencies hit the bottom. As such, While a short-term correlation might be difficult to avoid, there is a possibility that cryptocurrencies could change markets in the long term.