The year 2009 marked the beginning of Bitcoin and coincided with the bull market run of the United States stock market that has continued to skyrocket since then. But despite the good fortunes being experienced in the stock market, there are always murmurings of an impending crash, and the noise has gotten even louder recently.
Despite the Covid-19 pandemic bitting harder in the last couple of years, stocks have continued to edge higher, thanks to the massive support from the government. But with quantitative easing policies no longer being implemented, are the murmuring of a stock market crash justified?
Now, the million-dollar question is, what will happen to crypto if we ever experience a stock market crash? Read on as we delve into more details.
How likely is a crash?
Removing crypto from the picture, the increasing speculation about a possible crypto crash does hold some weight. For instance, inflation figures for the month of July in the U.S were significantly higher than experts expected. Meanwhile, the government has continued to roll out more bonds while taking on more debt. Also, there are speculations on raising the debt ceiling.
The justification for this move has been attributed to the ongoing pandemic relief effort. Unfortunately, experts think that the government’s efforts, including pumping money into the economy, aren’t worth it, especially as other signs, including stock prices, show that the relief isn’t really needed.
Again, the US real estate markets are skyrocketing, even though the Federal Reserve has continued to express concerns that investors are becoming increasingly reckless, especially with the surging appetite for meme stocks and cryptocurrencies.
Here is the thing, all this money being pumped into the economy has to dry up at some point. And when that happens, you’ll agree that it could result in a stock market crash. According to experts, the rumors about the imminent stock market crash are justifiable as experts predict a heavy correction.
According to Michael Van De Poppe, “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.”
Similarly, Toya Zhang, the marketing manager at AAX exchange, believes that the stock market is destined for a crash. However, he sues for caution on any 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 said. “Nobody can say exactly when that will happen, though.”
Will the correlation last long?
One question that comes to mind when discussing the correlation between crypto and stocks is how connected the recent market recoveries are both in the stocks and the crypto market, especially in March 2020? To be honest, many market analysts were pleasantly surprised at the recovery rate. That said, we weren’t particularly surprised at the recovery rate of the S&P 500, especially since it skews heavily to tech companies.
Unfortunately, the narrative in the crypto space was quite different. With no explanation for the recent crypto market crash, many people were surprised that BTC behaved in a way that mirrored stocks. Before now, the assumption was that Bitcoin was uncorrelated and would typically act as a hedge against other traditional assets like stocks and precious metals.
If historical data are anything to go by, then it would mean that a stock market crash in 2021 would definitely impact the crypto market. Another scenario would be that in the case of a stock market crash, investors would consider moving their funds into crypto. This scenario seems quite unlikely even without a look at March 2020 market hindsight. The reality is that cryptocurrency is still a notoriously volatile asset and hasn’t been sufficiently explored as a safe haven in the phase of a financial crisis.
Nonetheless, what happens after a crash could spur a more interesting discussion about market correlations. For instance, what happens if after a stock market crash we don’t see an automatic recovery mode? You’ll agree that this scenario is a reasonable assumption, especially if you closely consider the fact that the pandemic effect is now priced into the markets. Plus, there is much more uncertainty than we had this time last year.
What will be the response of Bitcoin in the event of a prolonged bearish period in the US stocks market? The most viable argument for the Bitcoin not correlated with stocks arguments is that BTC has its own market cycles linked to halving. This helps to dictate the price movements of bitcoin more than any type of external economic force. If you look at it from this position, you can easily speculate that regardless of whether or not the stocks markets recover after a crash, BTC will continue to print new all-time highs.
Unfortunately, despite the ever-reliable stock-to-flow BTC price model developed by PlanB, prices have performed quite differently and have struggled to stay within the boundary lately. That said, the recent rally in the crypto market shows that the model has held, and prices are showing significant promises of a sustained recovery. This means that even if there were to be a stock market crash that results in chaos in the crypto market, stats show that BTC market cycles could resume the iron-clad control of prices.
The battle of opposing forces
Should there be a short-term crash in the stock market, there isn’t any evidence so far that suggests that Bitcoin wouldn’t follow suit. Let’s assume that there will be a stock market crash in 2022; what could play out would be a struggle between the Bitcoin market cycle amidst the effects of a prolonged economic downturn.
Nevertheless, assuming the effect of the former is greater than the latter, even by a slight margin, bitcoin will make for an attractive, safe-haven asset (that’s, of course, in the absence of an alternative). Assuming everything keeps going down, bitcoin only needs to maintain its value to appeal to investors. On the flip side, should bitcoin halving prove to negate the effects of a sustained bearish market, Bitcoin will be the only asset to offer the opportunity for significant returns during a bearish market.
According to Sean Rach, the co-founder of a non-profit blockchain services firm, Hi, cryptocurrency will become an appealing asset for alpha seekers. He also 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.” Mati Greenspan, the CEO of Quantum Economics, stated,
“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.”
To wrap up, we want you to always keep in mind that even though crashes are bound to happen, they are short-term events. Sure, they may be painful, but looking at the long-term outlook reveals some fascinating details. Let’s assume that stocks experience a sustained bearish market while the microeconomy recovers; this would present an opportunity for investors to get some really great crypto projects at a bargain. So while a short-term correlation may be challenging to avoid, there is every likelihood that crypto will buck the markets in the long run.