The idea that Bitcoin and cryptocurrencies as an asset class or a great hedge against other forms of investments taking a nosedive is a wonderful theory. But is it true? As we explore that answer, it’s important to keep in mind that investing is just like gambling. Risk is always tied to reward. But unlike gambling, where gamers usually stick to gambles where they think they have the best chance to win and often don’t deviate away from the games or sports bets they enjoy, investing requires a commitment to the long term and a commitment to diversity. When we say diversity, were talking about investing in a range of assets and once portfolio.
Should Bitcoin be part of that mix for you? Let’s dive deeper and find out.
Covid-19 Demonstrates Bitcoin Not Necessarily a Good Alternative
With the S&P 500 crashing thousands of points in mere days or weeks back in mid-March, many proponents of Bitcoin would have likely guessed that pouring money into cryptocurrency would be a better bet. Subscribing to that theory makes sense. After all, governments all around the world are literally printing money just to help businesses of all shapes and sizes get through hard times. Printing more money means devaluing currency over time especially when the printing of that money isn’t related to the discovery of some sort of new asset or resource that’s actually bring value to the world. It’s literally just the government scrambling to take care of people.
And yet, those that took the theory of centralized entities printing money being good for Bitcoin likely got smoked by the market in the short term. After going crazy to start 2020, the price of Bitcoin plummeted all the way to around $3,100 in mid-March amid all of the fear that this pandemic created. If anything, this proves that the behavior of the crypto currency market is actually tied directly to stocks and other securities.
Will Bitcoin and Stock Correlation Last Into The Future?
A report from Binance Research suggests that the correlation between Bitcoin and the stock market was moderate in the first quarter of 2020 but that it won’t last into the long term. It’ll be really interesting to see what happens once governments stop pumping out stimulus packages to help individuals and businesses get through these tough times. What’s especially important to consider is the fact that major banks offering homeowners a break on mortgage payments will expect to collect money starting in the fall. While homeowners choosing to defer aren’t currently making payments, they are also not building equity in the will still owe that money when times get good again.
So will the correlation actually last? That’s unlikely, but until the global economy gets out of this coronavirus rut, investors will likely be pulling their finances out of the market regardless of the asset class.
Bitcoin is simply that. An asset class. It’s different from physical gold or traditional financial instruments like stocks, mutual funds and bonds no doubt. But just because digital gold resides on the blockchain and relies on a community of people to run its decentralized technology, doesn’t mean that as an investment it’s still not tied to the actual market.
At the end of the day investors live in both cryptocurrency and stocks are exposing themselves to a free market. But not just a free market. It’s an efficient market where those with access to information can capitalize on it and profit from it. That’s why it’s so hard to invest during times like these. We don’t all know what the next bit of information will reveal and we don’t always know how that information will affect the ups and downs of the market.
Invest in Bitcoin to diversify no doubt, but don’t expect to be completely unaffected by downturns in the market unless you are okay was sitting on the sidelines and not taking any chances at all.