Much has been made of the high degree of correlation over the last few months between the prices of Bitcoin and other cryptocurrencies, and traditional markets such as the stock market. The trend appears to be that Bitcoin follows the stock markets, albeit with greater force. As of late, the stock market collapse has been problematic for all sectors of finance, and Bitcoin hasn’t fared much better.
This has led many, who were sold Bitcoin on the premise that it was an uncorrelated store of value, to doubt their decision and to come to think that it needs to decouple before meriting a place in a portfolio.
Bitcoin remains relatively uncorrelated over the longer term
When one looks at Bitcoin over the longer term, it is evident that it is one of the most uncorrelated assets in the world. This is reflected in the oscillations of price compared to the stock market, as well as the fundamentals.
Typically, the stock market operates with 6-7 year cycles. This previous bull market, which looks to be coming to a close as we continue with the recession, was an exception to the rule was only made possible thanks to the high degree of intervention from central banks.
Bitcoin, by contrast, has very simple fundamentals that one can forecast with a high degree of accuracy into the future. It is far easier to map Bitcoin’s future cycles than stock market cycles given the significance (although diminshing) of each halvening.
The stock market collapse has proven the importance of DeFi’s resiliency
One of the main benefits to investing in crypto is that many of the people working behind the scenes building projects and improving the space are remote workers or are able to change their location with relative ease.
This has some huge advantages, not only in terms of how the workers live their lives, but also in the degree to which the companies that they are building can remain resilient. Once a DeFi protocol such as Uniswap V2 is deployed to the blockchain, it is not possible for any of the parameters of the AMMs to be tampered with by outsiders, and they will continue to function in perpetuity. In many ways, the global nature of DeFi means that nation state attacks are futile, since those who are writing the code can simply move to a friendlier jurisdiction.
The fact that deployed code can be immutable is incredibly important, because it means that the foundations for the future of finance are far more stable and secure than they would have been otherwise.
A total meltdown of other financial markets is disastrous, but when there is a meltdown in the DeFi space, liquidations are processed immediately and even if there is a liquidation cascade, it removes the underlying risk and leverage that was in the system. Compare this to traditional finance, such as with Bear Stearns in the 2008 financial crash, or with the opaque and centralised practices of hedge funds such as 3AC, where undercollateralised loans were not quickly processed and liquidations could not easily be made in real time: the risk stayed in the system longer term.
It is important that investors are aware of the risks and can differentiate between systemic risk and temporary price volatility.
A price decouple in the medium term isn’t necessarily a good thing
It remains to be seen how stock will continue to perform as the US enters its final stages of empire cycle, but many analysts, such as David Murrin, have warned that the coming years will see some of the highest degrees of volatility that many of us will see in our lifetimes.
All currencies are losing value at the moment given the incredible amount of quantitative easing that has been seen over the past few years. There could be a rise in stock prices not because of the fact that companies are more efficient today than they were in the past, but because the dollar is devaluing at such a fast rate.
In such a scenario, despite the fact that the stock market is falling in real terms, investors may choose to buy risk-on assets such as stocks, shares, and Bitcoin, because they may still be able to strengthen against the dollar.
If this scenario were to play out, inflationary as it may be, a high degree of correlation with stock may not be such a bad thing – stocks would rise, and Bitcoin would rise, albeit Bitcoin would rise faster since the relative market cap is smaller.
On the other hand, it is quite possible that Bitcoin could rise or fall regardless of what happens in the stock market. As a speculative asset class, one must be prepared for the worst, and hope for the best. Speculators should be cautious of the phenomenon that occurs when Bitcoin, often treated as a far more speculative asset than stocks, may be sold first – in deleveraging events, the most volatile assets are usually sold first.
Over the long term, investors ought to ensure that they are investing in assets that they have high conviction in and understand – worrying about price correlation over the short term is an exercise in missing the wood for the trees. A market collapse in any asset over the short term is not only possible, but likely if one holds for long enough, and this is something that people ought to be prepared for.
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