Bitcoin’s lack of integration with traditional finance and its inability to be majorly sold to cover financial losses mean that the price might not ‘collapse’ in case there is a global stock market meltdown.
One of the reasons behind BTC’s volatility, the massive price oscillations that happen regularly, is the discrepancy of its use cases. Some of the pundits perceive it to be ‘digital gold’ a mainly scarce and perfect store of value (SoV). Others believe Bitcoin is a technology project or a type of software with a corresponding network.
On its part, El Salvador’s adoption as legal tender might underpin the means of exchange (MoE) functionality that the Lightning Network offers. The Layer-2 scaling solution supports instant and insanely cheap transfers, even though it needs regular on-chain transactions to exit or enter this parallel network.
As these narratives about bitcoin keep shifting over time, so does Bitcoin’s correlation to the traditional assets. For instance, there have been sustained periods of a strong correlation with gold.
The March 2020 major crash was devastating for nearly every asset class, but the recovery pattern that followed the six or seven months that followed was nearly identical for Bitcoin and gold. Interestingly, the opposite movement happened in 2021, displaying an inverse correlation between the two assets.
Is Bitcoin A Tech Stock Proxy?
On the flip side, Bitcoin started to mimic the Hong Kong stock market, as it was measured by the Hang Seng Index (HSI). Among the top constituents are Alibaba, Tencent, and Meituan, which are billion-dollar Asian technology firms.
The shift in investors’ perspective, from tracking the gold price to tech stocks, begs just one question of whether BTC will succumb to the Hang Seng downside movement seen in the last 90 days. Does it make any sense to decouple right now? If that is the case, will bitcoin continue to act as a haven amid a general correction?
On September 14, China’s second-biggest property developer, Evergrande Group, said that a considerable drop in sales compelled the firm to postpone payments over its debt. This company has more than $300 billion in liabilities that may impact the broader market greatly, according to experts and analysts.
In August 2021, China’s retail sales disappointed at around 2.5% compared to the previous year, where the investors expected a 7% growth rate. Growth and the economy were heavily affected in 2020 by governments’ reaction to the Covid-19 outbreak.
Nevertheless, one needs to consider that the most influential Central Banks have been practicing near zero or even negative interest rates since the Q1 of last year. Therefore, if the economy fails to gain any substantial momentum amid the multiple trillion-dollar stimulus packages, there is not a lot that can be done to prevent a generalized stock market correction and possible losses on debt markets.
The issue is: BTC might be 12 years old, but it has never encountered a considerable economic crisis, at least nothing that puts the $250-trillion global debt markets at risk. Hence, any analysis or estimate might yield a credible assessment.
Bitcoin Might Be Less Affected By Market Meltdown
Nonetheless, the flagship crypto has an edge over traditional markets like stocks, commercial real estate, and bonds. Lenders might foreclose on the assets in case the clients default on their payments, and this adds more pressure since the bank or financial institution does not have any interest in keeping them.
On the flip side, in general, cryptos and bitcoin cannot be used as collateral.
About the billion-dollar bitcoin futures liquidations on the derivatives markets, these are just synthetic instruments. Undoubtedly, the events will affect the price, but eventually, the effective bitcoin stays at the derivates’ exchange. It mainly moves from the long (buyer) balance to the short (seller) account.
Until BTC becomes entirely entrenched in the financial markets and accepted as collateral and deposits, the mid-term systemic risk for the crypto is lower when compared to the traditional market.