Bitcoin has continued to make its way to the top even as the crypto space continues to enjoy a massive wave of adoption. But the big question on the lips of many crypto enthusiasts is if bitcoin’s halving cycles can push through a hypothetical post-covid economic crisis or is the number one cryptocurrency by market cap destined to be correlated with stocks? Read on as we delve further.
The year 2009 is a pretty significant year for cryptocurrency. On the one hand, it marked the genesis of Bitcoin, and on the other hand, 2009 kicked off an unprecedented bull market in the United States stock market, a bull market that has continued ever since. But like every financial market, there are always rumors and predictions of an imminent crash. That said, these murmurings are getting louder by the day.
Despite the Covid-19 pandemic remaining longer than anyone had expected, the stock market keeps pushing higher, thanks to the unprecedented amount of government support it is enjoying. But now that quantitative easing policies aren’t longer implemented, is there any justification for the rumors of a stock market crash? Read on as we delve a little further.
If that’s the case, then the number one cryptocurrency by market cap, BTC, will likely take a hit. And that’s because experts believe that there are signs of a robust correlation between bitcoin and stocks. So now, the big question is, what will happen to crypto if there were ever to be a stock market crash? Read on as we will get to all of that in a bit.
Is there any likelihood of a crash?
Taking crypto out of the argument, the increasing arguments and forecast about a crash in stock prices is imminent and does hold some merit. For instance, the inflation rate in the U.S. in June was significantly higher than anyone expected. On the side, the U.S. government has continued to issue bonds and take on more debt to the extent that there is now talk of raising the country’s debt level.
The popular justification for this decision has been attributed to the effects of the ongoing pandemic relief effort. Unfortunately, the government has continued to push more into the economy despite other signs like the U.S stock prices indicating that the relief isn’t needed. More so, the U.S. real estate markets are also enjoying a remarkable surge. Additionally, the Federal Reserve has continued to warn that investors are increasingly becoming reckless, referencing the increasing appetite for meme stocks and crypto-assets as cases in point.
The reality is that all the money the government is pumping into the economy will eventually dry up at some point. This is the reason why many experts have a justifiable argument that a crash is imminent. According to Michael van de Poppe, a full-time trader, and columnist, “the expectations of a heavy correction are justified,” adding: “The chances of a [stock market] collapse are increasing day-by-day, as the markets are getting overheated heavily — not just in stocks, but real estate markets are showing similar signals. […] The market is going into a bubble phase, created by an insane amount of printing from the Fed, through which the middle class is getting squeezed.”
While the marketing manager at AAX exchange, Toya Zhang agrees that a crash is imminent he urges investors to stay calm and not attempt to predict the timing. “Given how common stock market declines are, and the fact that the market is somewhat overvalued, I think there’s a reasonably high probability of a stock market downturn,” Zhang added. “Nobody can say exactly when that will happen, though.”
How long will bitcoin and stocks remain correlated?
The big question on the lips of many financial analysts is how linked were the recent recoveries in both the stock and crypto market back in March of 2020? To be honest, most stock and financial analysts were pleasantly surprised by how fast the recovery was. Despite the fact that stocks like S&P 500 skew heavily to tech, it shows how quickly the world has gone digital.
On the flip side, the narrative within the crypto space was a lot different. In the absence of any reasonable explanation for the crypto market crash, many people were pleasantly surprised that BTC behaved in a way that looked to mirror stocks. After all, there has always been this assumption that bitcoin was uncorrelated and will act as a hedge against more traditional assets such as precious metals and stocks.
If recent experiences are anything to go by, then history suggests that in the event of a stock market crash, the crypto market will most likely take a hit. And should that be the case, the alternative scenario would be investors converting their assets into crypto. Even without the event of March 2020 in hindsight, this scenario seems unlikely and that’s because cryptocurrency has a reputation of being a notoriously volatile asset and one that is untested as a safe haven in financial crises.
Nevertheless, what happens after a crash could open the flood gate for a more interesting discussion about market correlations. What if for instance after a stock market crash, we don’t witness any automatic recovery mode? While we don’t like to sound pessimistic, this scenario is a pretty reasonable assumption, especially considering that the pandemic effect is now priced into the markets. Plus, there is a lot less uncertainty right now than there was in March of last year.
How would bitcoin react in the phase of a prolonged flat or even bearish period in U.S. stocks? The most robust premise for Bitcoin is uncorrelated with stocks argument is that bitcoin has its own unique market cycles, one which has been heavily linked to halving, an event that dictates movements in a far more compelling way than any external economic forces. If we are looking at it from this angle, we could argue that regardless of whether the stock markets had recovered post-march 2020, BTC halving events would still have pushed the number one cryptocurrency by market cap into achieving new all-time highs regardless.
But even against the backdrop of BTC’s stock-to-flow model developed by PlanB, the price of bitcoin has continued to struggle to stay within the boundary of late. That said, the recent rally in price shows that the model has held up pretty fine, plus, prices are currently showing significant promise of a sustainable recovery. So even if there was to be a massive sell-off in the stock market that ended up affecting crypto, there are available data showing that bitcoin market cycles could most likely resume their iron-clad control of prices.
Bitcoin vs stocks: A battel of supremacy between opposing forces
If we are ever to witness a short-term crash, there isn’t a shred of evidence at the moment to suggest that BTC price will fail to react. Let’s assume for a minute that a stock market crash was to happen in 2021, what will eventually follow afterward would be a struggle between bitcoin’s market cycles and the effects of a sustained economic downturn.
Nevertheless, assuming that the effect of the former can outweigh the latter by let’s say increment, it will undoubtedly make bitcoin an attractive safe-haven asset (i.e. in the absence of many other alternatives). If every other asset is experiencing a downward spiral, all bitcoin has to do is maintain its value to tempt investors. And should bitcoins halving cycle prove to negate the effect of a sustained market downturn altogether, it would simply mean that bitcoin will be the only reasonable asset to continue to offer the opportunity for a robust return during an economic downturn.
According to the co-founder of not-for-profit blockchain services firm Hi, Sean Rach, crypto will ultimately become an attractive asset for alpha seekers. Speaking on this, he added that, “The growing dissatisfaction with the financial system, as well as the history of all fiat currencies, means the search for alternatives remains a positive factor for the growth of the crypto markets,” Speaking to Cointelegraph, the CEO and founder of Quantum Economics, Mati Greenspan had this to say about cryptocurrency:
“In the short history of the crypto asset class, the token market has largely moved in line with other risk assets like stocks and commodities. They tend to react especially well to central bank money printing. Still, there is a lot more room for growth in crypto since it’s largely in the early development phase. So even if we see equities hit a top, I don’t think it’ll have any sustained impact on digital assets.”
Finally, it is always important to remember that crashes are short-term scenarios. Sure, they may be painful, but a look at the long term is where things get pretty dicey and interesting. Let’s assume for a minute that stocks experience a sustained period of bearish market sentiments while the macroeconomy recovers, what would likely follow is an opportunity for investors to scoop up a bargain once crypto booms out. So while short-term correlation could be pretty hard to avoid, there is every likelihood that crypto could end up favoring the markets in the long term.
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