BTC's lack of integration with traditional finance and the inability to be forcibly sold to cover financial losses mean the price may not 'collapse' in the event of a global stock market crash.
One of the reasons behind Bitcoin's ( BTC ) volatility , the sharp price swings that happen regularly, is the discrepancy of its use cases. Some observers call it “digital gold,” a perfect and truly rare store of value (SoV). Others see Bitcoin as a technology project or a type of software with a corresponding network.
Adoption in El Salvador as legal tender will likely highlight the medium of exchange (MoE) functionality provided by the Lightning Network. The layer-2 scaling solution enables instant and incredibly cheap transfers, even though it requires regular on-chain transactions to enter or exit this parallel network.
As these Bitcoin narratives transform over time, BTC's correlation to traditional assets does the same. For example, there have been long periods of strong correlation with gold.
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| Bitcoin vs. gold (precious metal) in 2020. Source: TradingView |
Is Bitcoin a Proxy for Tech Stocks?
Towards the end of 2020, Bitcoin began to mimic the Hong Kong stock market, as measured by the Hang Seng Index (HSI). Major components include Tencent, Alibaba and Meituan, multi-billion dollar Asian technology companies.
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| Bitcoin vs. Hang Seng Index (stocks). Source: TradingView |
On September 14, China's second largest construction contractor, Evergrande Group , announced that a significant drop in sales has forced the company to postpone its debt payments. This single company has over $ 300 billion in liabilities, and analysts say it could have a major impact on the overall market.
In August, retail sales in China disappointed with 2.5% over the previous year, while investors expected a growth rate of 7%. Obviously, growth and the economy have been hit hard by governments' reaction to the Covid-19 pandemic in 2020.
However, it has to be considered that the most influential central banks have introduced near-zero or even negative interest rates since Q1 2020. So if the economy fails to gain momentum from several billion dollar stimulus packages, there is no need to do so. 'Much needs to be done to prevent a general correction in the stock market and potential losses in the debt markets.
The problem is this: Bitcoin has been around for 12 years, but it has never faced a significant economic crisis, or at least anything that puts global debt markets of more than $ 250 trillion at risk. Thus, any analysis or estimate is unlikely to offer a credible assessment.
Bitcoin may be less affected by a market crash
However, cryptocurrency has an advantage over traditional markets such as commercial real estate, stocks and bonds. If customers are insolvent, creditors can foreclose these assets, adding further pressure as the bank or lender involved is not interested in keeping them.
Conversely, Bitcoin and cryptocurrencies in general cannot be used as collateral.
As for the settlement of billion dollar Bitcoin futures in the derivatives markets, these are only synthetic instruments. These events undoubtedly affect the price, but ultimately the actual BTC remains on the derivatives exchange. They simply move from long (buyer) to short (seller) account.
Until Bitcoin is fully incorporated into the financial markets and accepted as collateral and deposit, the medium-term systemic risk for the cryptocurrency is reduced compared to the traditional market.