Both the creation of Bitcoin and the beginning of the United States stock market’s historic bull market, which has lasted virtually continuously since, occurred in 2009. However, there are constant rumblings of a crash, and they have just become louder.
Stocks continue to rise in spite of COVID-19’s persistent presence, supported by an unprecedented level of government aid. Is the talk of a stock market crash justified given that quantitative easing policies have been abandoned?
If so, the following potentially bad news for Bitcoin (BTC): There may be evidence of a significant association between Bitcoin and stocks. So what would happen to cryptocurrency if U.S. stocks experience a downturn?
How probable are crashes
Even without cryptocurrency, there is some truth to the growing rumors of an impending crash. The U.S. inflation rate for June was far higher than anticipated. The government kept issuing bonds and piling up debt in the interim, to the point where lifting the debt ceiling is now being discussed.
The continuing pandemic relief effort, of course, serves as reason for this. However, the government is injecting cash into the economy even while other indicators, like the value of American stocks, show that the assistance is unnecessary. While the Federal Reserve has already raised worries that investors are acting more recklessly, citing the demand for joke stocks and cryptocurrencies as examples, U.S. real estate markets are also booming.
Right now, they are related, but for how long
One query is: How interconnected, back in March 2020, were the recent market recovery in both cryptocurrency and the stock market? The majority of stock market analysts were taken aback by how quick and intense the comeback was. However, considering how swiftly the world shifted to digital, the fact that the S&P 500 skews significantly toward tech businesses explains a lot.
But the story was considerably different in the crypto realm. Most people were startled that Bitcoin had acted in a way that seemed to mimic equities because there wasn’t any other explanation for the crypto market fall. Since BTC was thought to be uncorrelated and would serve as a hedge against more conventional asset classes like stocks and precious metals, this assumption had always been made.
History suggests that the crypto markets would crash in 2021 if the stock markets did, based on the most recent experience. An alternate scenario is that investors migrate money into cryptocurrency as soon as the stock market crashes. This seems unlikely even without the benefit of looking back in March 2020. Cryptocurrency is still thought of as a very unstable asset that hasn’t proven to be a safe refuge during a financial crisis.
However, the examination of market correlations could be more fascinating if it focused on what occurs after a crash. What if the stock markets don’t automatically resume their upward trend this time? Given that the pandemic effect has now been factored into the markets and that there is significantly less uncertainty than there was in March of last year, this scenario is conceivable.
What would BTC do if U.S. stocks experienced a protracted flat or even bearish phase? The strongest claim in favor of the “Bitcoin is uncorrelated to equities” thesis is that the price of bitcoin is determined by its own market cycles, which are correlated with halving, rather than by any external economic factors. By looking at it from this angle, one may hypothesize that BTC would have continued to reach new all-time highs even if the stock markets had rebounded after March 2020.
However, prices have recently had trouble staying within the limit, even when compared to the PlanB stock-to-flow BTC pricing model, which is incredibly stable. However, the recent surge indicates that the model has held, and prices are now showing strong signs of a long-term recovery. Therefore, even if turmoil in the stock markets were to destabilize the cryptocurrency market, research suggests that the BTC market cycles may eventually regain their ostensibly unshakeable hold over price movements.
A conflict between opposing powers
There is currently no evidence to imply that the price of Bitcoin won’t fall in response to a short-term crash. In the event that this occurs in 2021, what happens next may involve a conflict between Bitcoin’s market cycles and the results of a protracted economic downturn.
However, if the former can even slightly outweigh the latter, it will make Bitcoin more appealing as a safe-haven asset (in the absence of many other alternatives). BTC simply needs to keep its value steady to entice investors if everything else falls. Imagine, however, that Bitcoin’s halving cycle is able to completely neutralize the impact of a protracted market collapse. In that situation, BTC might end up being one of the only assets to have the possibility of substantial gains during a slump.