Brace For Impact! How Would Another Stock Market Crash Affect Bitcoin?
Major names in finance are raising the alarm that stocks are vastly overvalued – more so than ever. Should the traditional market crash again, how would this affect bitcoin (BTC)? Analysts believe that BTC would feel the impact, but, this time, there is a chance it might be different.
Legendary investors Stan Druckenmiller and David Tepper were the latest to weigh in after a historic market rebound, saying the risk-reward of holding shares is the worst they’ve encountered in years, Bloomberg reported today, adding that there is no way for a quick economic recovery once the ongoing pandemic eases, nor will the USD 3 trillion stimulus by the Federal Reserve (Fed) be enough to compensate for the massive blow to the economy and markets. The newest BTC star, another prominent hedge fund manager Paul Tudor Jones also voiced doubts about markets. He also recently confirmed that his fund has already invested hundreds of millions of USD in bitcoin.
Meanwhile, Social Capital CEO and Virgin Galactic Chairman, Chamath Palihapitiya, told CNBC that the economy is "completely divorced" from the stock and bond markets, and that "the Fed has been the principal agent of that obfuscation."
The S&P 500 Index is down almost 5% this week, with investors and economists forecasting further declines.
Meanwhile, data shows that BTC is attempting to decouple from the stock market once again.
BTC and S&P 500 correlation chart
"We are seeing a short-term decoupling occurring but time will tell if it is sustained," Tom Lombardi, Director at Wave Financial Group, a Los Angeles and London based digital asset investment management company, said, adding that "the current bitcoin outperformance to stocks is likely a search for high-risk yield, not a safe haven or hard asset investment."
According to him, we are still in the early days of bitcoin so the "safe haven store of value" thesis is just that - a thesis: "Institutional / mature investors don't see it that way."
Lombardi noted that if the possible new selloff is narrow to just stocks, there are many times in history when bitcoin remained decoupled from the stock market.
Significant strides and initial signs
“It's difficult to say what might happen to BTC should the stocks see another dip,” Mati Greenspan, founder of Quantum Economics, told Cryptonews.com. The last dip showed us what can happen in a market panic.
However, “BTC has made some significant strides in the past few weeks," said Greenspan, "and if investors feel that it's a valid hedge against whatever forces drive the market lower, next time it might remain much more resilient.”
Bitcoin analyst Simon Dingle agrees that a flight to cash would impact BTC yet again, but says this time will be different because we're seeing the initial signs of a hype cycle returning to bitcoin and crypto, which is partly sparked by Bitcoin halving.
Furthermore, according to Dingle, BTC has been compared to gold and other safe-haven assets lately, while at the same time, more people are realizing that BTC is measurably scarce, as well as easily transferable in a way that physical assets like gold are not.
“As the understanding of BTC grows, so does its appeal as the best possible store of value during uncertain times. All that is missing now is the following realization, that it is also an unbeatable medium of settlement,” the analyst told Cryptonews.com
"TD Ameritrade Head of Research estimates that total Federal Reserve balance sheet will increase from USD 7 trillion to USD 12 trillion by the end of 2021. Any hedge fund manager with capital and/or a public voice would jump all over this narrative with investments in forex, gold, and bitcoin," Lombardi added.
However, speculating on short term price movements is a waste of time, according to Bitcoin entrepreneur Matt Odell: "The reality is nobody really knows what will happen. On a long term basis, bitcoin fundamentals appear stronger than ever."
At pixel time (16:01 UTC), BTC trades at USD 9,645 and is up by 5.5% in a day and 2% in a week. The price increased by 39% in a month and 20.5% in a year.
If the coronavirus economic climate drags us down to $40 billion, but $1 trillion leaks into BTC from equities, we'… https://t.co/vRnShfBR4Z— Eric Wall (@ercwl)
Stonks be rolling over, #bitcoin be mooning. SPX double bear market rally top at the 62% retracement, rut roh. Fire up those stimulus checks and let’s take out $10k bitcoin. pic.twitter.com/1vdRpDg5ZX— Arthur Hayes (@CryptoHayes) May 14, 2020
Dear stock market,— The Wolf Of All Streets (@scottmelker) May 14, 2020
Your low volume, 61.8% retrace bull trap is likely coming to an end. I will continue aggressively shorting you until you make sense.
Could agree more. Market positioning is still somewhat risk off. Look at the $BTC put-call skew, the 14D RSI, the crypto fear and greed index.— SpartanBlack (@SpartanBlack_1) May 14, 2020
When this turns risk on, we are going to get a major move in price. https://t.co/xefapVxNc7