Recently, Bitcoin and all the other cryptocurrencies have been attracting a lot of attention. More specifically, they have started to attract the notice of institutional investors who have lots of cash and see limited opportunity in elevated stocks and a tanking bond market. With these factors in mind, they have been buying up ever-growing quantities of cryptocurrencies both as a speculative investment and as a hedge against broader market downturns.
This raises the question as to how much utility there is in using Bitcoin as a hedge against market turbulence. While it might seem, at first glance, to be extremely counter-cyclical, there are reasons to suspect that this may not be correct in the event of a major downward move. It may also depend on what sort of decline is under discussion and how deep and protracted it may be.
First Off, What Happened in the Previous Correction?
As we see from the two charts below, when stocks were dumped in March of 2020, Bitcoin got dumped as well.
Do We Have an Asset Bubble?
Interest rates approaching 0% has put easy money into the hands of investors, and the result has been that much of that capital has gone into investments like tech stocks, commodities and cryptocurrencies. In a world where low interest on savings are a reality, governments are encouraging people to borrow, spend and not save.
Business Insider – The Fed will be forced to buy more bonds as US stimulus drives up interest rates, Ray Dalio says https://t.co/oahukbi0GU pic.twitter.com/dnMRDg4tOV
— Jason S (@theluckyman) March 21, 2021
Should interest rates start to rise, the purchasing power of overindebted holders of home loans and other debts will suddenly disappear. Cheap money that were pushed into many investment classes will be withdrawn to service debt.
Eventually it would lead to the decline of assets back to more traditional price earnings valuations and lead to major players getting out of the markets early and parking their surplus funds elsewhere until the shakeout is complete. In a world where Bitcoin is gaining more of a safe haven reputation versus printed Fiat currencies, it could eventually recover sooner than other asset classes, and might see a steeper recovery curve.
Bad News Drop
This might be triggered by something such as a renewed pandemic, some terrorist event that causes serious damage, or some form of natural disaster that takes out part of the logistics chain of the world. So far as Bitcoin is concerned, the worst possible risk for it happens in a crisis severe and sharp enough to wreak havoc in the hedge funds and among speculators in general. Margin calls would be made and have to be met by selling the most liquid assets on hand in order to raise fast cash.
Bitcoin would certainly be one of those assets that would get hastily dumped. This would quite obviously drive its price down in tandem with the wreckage inflicted on the rest of the market. The price might go lower still if some black swan events crop up simultaneously.
