Will the Bitcoin price drop if the stock market crashes?

The year 2009 marked both the birth of Bitcoin and the US stock market starting an unprecedented bull market – a market that has continued almost uninterrupted ever since. However, puffs from collision are always present, and the noise has recently increased.

On the back of COVID-19’s refusal to dip, stocks continued to rally, buoyed by an unprecedented amount of government support. But now that the implementation of quantitative easing has stopped, is talk of a stock market crash justified?

If so, this could bring unfortunate news for Bitcoin (BTC): arguably there are signs of a strong correlation between Bitcoin and stocks. So, what would happen to cryptocurrencies if the bottom fell outside US stocks?

How likely is an accident?

Taking cryptocurrency out of the picture, the growing speculation that a collapse is imminent has some advantages. In June, US inflation was much higher than expected. Meanwhile, the government has continued issuing bonds and accumulating more debt to the point that there is now talk of raising the debt ceiling.

The justification for this, of course, is the ongoing pandemic relief efforts. But the government is pumping money into the economy when other signs, such as US stock prices, indicate that relief is not necessary. US real estate markets are also on the rise, while the Federal Reserve has already expressed concerns that investors are becoming increasingly reckless, citing the desire to buy meme stocks and cryptocurrency as core cases.

All of this money pumping into the economy has to dry up at some point, leading to well-founded speculation that a crash might be the inevitable result. Michael van de Poppe, a Cointelegraph columnist and full-time trader, believes that “expectations of a major correction are justified,” adding:

“Chances [stock market] The crash is increasing day by day, as the markets are getting very hot – not only the stocks, but the real estate markets are showing similar signs. […] The market is going through a bubble phase, created by an insane amount of printing from the Federal Reserve, through which the middle class is being squeezed.”

Toya Zhang, director of marketing at exchange AAX, agrees that the crash is coming but urges caution when trying to predict the timing. “Given the extent of the overall stock market downturn, and the fact that the market is somewhat exaggerated, I think there is a reasonably high probability of a stock market downturn,” Zhang said. “No one can say exactly when that will happen, though.”

Connected now but for how long?

One question is: How related is the recent market recovery in both crypto and the stock market in March 2020? Most stock market analysts were surprised by how fast and severe the recovery was. Although the fact that the S&P 500 is skewed so heavily toward tech companies explains a lot given the speed at which the world is going digital.

But in the field of cryptography, the narrative was somewhat different. In the absence of any other explanation for the crypto market crash, most people were surprised that bitcoin behaved in a way that seemed to mirror stocks. After all, the assumption has always been that BTC is uncorrelated and will act as a hedge against traditional asset types like stocks and precious metals.

Based on the latest experiences, history may indicate that if the stock markets crash in 2021, the crypto markets will follow. An alternative scenario is that the stock market collapses and investors immediately transfer funds to cryptocurrencies. Even without the benefit of March 2020 hindsight, this seems unlikely. Crypto continues to have a good reputation as a volatile asset, one that has not been tested as a safe haven in any financial crisis.

However, what happens after the crash may lead to a more interesting discussion about market correlates. What if the stock markets didn’t go into automatic recovery mode this time? This scenario is a reasonable assumption, given that the impact of the pandemic is now being priced in the markets, and there is much less uncertainty than there was in March last year.

What will BTC do if there is a long steady or even bearish period in US stocks? The strongest hypothesis of the “bitcoin is not tied to stocks” argument is that bitcoin has its own market cycles – correlated with the halving – which dictate its price movements in a more persuasive way than any external economic forces. Examined through this lens, one can speculate that regardless of whether the stock markets rebounded after March 2020, BTC would have continued to reach all-time highs anyway.

But even against the always reliable BTC price model advanced By PlanB, prices have been struggling to stay within limits lately. However, the recent rally means that the pattern has held, and prices are currently showing great promise for a sustainable recovery. So, even if the turmoil in the stock markets wreaks havoc on cryptocurrencies, there is data that predicts that Bitcoin market cycles could eventually resume its iron-clad dominance of prices.

The conflict of opposing forces

If there is a short-term crash, there is no evidence yet to suggest that the price of bitcoin will not follow. Assuming that happens in 2021, what happens next could become a struggle between Bitcoin market cycles and the effects of a prolonged economic downturn.

However, assuming that the impact of the former can outweigh the latter even through 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 just needs to maintain its value to entice investors. But let’s say the Bitcoin halving turns out to be able to completely negate the effect of a prolonged market slump. In this case, BTC could become one of the only assets that offer an opportunity to generate significant returns during a downturn.

Shaun Rush, co-founder of non-profit blockchain services company hi, believes that crypto will eventually become an attractive asset for alpha seekers. “The growing discontent with the financial system, as well as the history of all fiat currencies, means that the search for alternatives remains a positive factor for the growth of the cryptocurrency markets,” Rush said. Meanwhile, Matty Greenspan, founder and CEO of consultancy Quantum Economics, told Cointelegraph:

“In the short history of the crypto asset class, the token market has moved largely in line with other risky assets like stocks and commodities. They tend to respond particularly well to printing money from the central bank. However, there is still more room for growth in cryptocurrencies. Since it’s pretty much in its early stage of development, so even if we see stocks reach the top, I don’t think it will have any sustainable impact on digital assets.”

In the end, it is worth remembering that accidents are short-term events. It may be painful, but the long-term outlook is where things get more interesting. Let’s say stocks end up in a sustained bear market while the overall economy recovers. In this case, it could easily turn into an opportunity for investors to get a bargain once the cryptocurrency is out. As such, while the short-term correlation can be difficult to avoid, there is a significant chance that crypto will break the markets in the long-term.