At the time of this writing, the price of Bitcoin is skyrocketing. It’s up to $9,185 USD per coin after being close to just $3,000 USD just seven weeks ago at the height of the coronavirus pandemic. Most investors, both novice and experienced, believe the price run-up at the present moment is due to the upcoming Bitcoin halving event, which is mere days away. The halving event cuts down the number of Bitcoins being rewarded to miners who secure the network in half. It’s an algorithmic way to control inflation.
Transactions on the Bitcoin network are validated in blocks. Every time 210,000 blocks are validated or ‘mined’, the reward cuts in half. The next time this halving happens, the reward will be 6.25 Bitcoins instead of 12.5 Bitcoins. That means people buying Bitcoin now and raising the overall value of the currency are betting that a sharply reduced new supply of coins in the long run makes the whole project way more valuable.
So the question remains. Why is there a good chance this is all coming to a crashing halt?
Goldman Sachs’ Scary Outlook
Alright. It’s time to get a little bit more technical than usual. Goldman Sachs is one of the largest and most successful investing firms in the world. Analysts routinely give out stock upgrades and downgrades that send prices up and down as retail investors take the company’s opinions to heart.
So what’s Goldman Sachs outlook on the stock market and crypto? Fairly negative right now to say the least. Here’s a bit of an explanation.
The S&P 500 is a stock market index worth anywhere from $27-$30 trillion at any given time. It features the top 500 companies in the world by market capitalization being bought and sold at one indexed price. Over the last few days, an analysis by the firm has revealed that out of the 500 companies listed on the index, five of them are responsible for 20% of the value of the entire Index. That’s a bad sign!
It points to an idea known as market breadth. If the value of such a big index is concentrated in only five companies, it means market breath is very low. When market breath is very low, stock prices typically reverse in full swing. Given how well the market has been doing over the last two or three weeks in particular, the next full swing is likely a full swing downwards that’s really going to hurt.
History Shows Bitcoin and the Stock Market are Correlated
The popular belief among Bitcoin enthusiasts is that since Bitcoin is not controlled by any governments or nations, its digital gold. A market analysis by Goldman Sachs states that at the present moment in a present-day coronavirus environment, the reverse is actually true. The popular belief is that when the stock market goes down, people actually sell Bitcoin in order to cover margins and make up for losses in the stock market. This supports the idea that Bitcoin is still considered by many to be a speculative gamble rather than a true long term investment.
Yes it’s true that more and more high net worth individuals are investing in Bitcoin. But the fact of the matter is for most people with a high net worth, cryptocurrencies likely represents a hedge against all of their other investments. That’s why hedge fund managers make so much money. Their job is to hedge against risk by moving large volumes of value into a variety of assets. When you have lots of money, you can afford to lose some in Bitcoin. So the fact that you have lots of money and you’re investing in it doesn’t necessarily mean that the price will stay high long-term. It doesn’t necessarily mean that you’re even bullish on the technology.
Investors in Bitcoin, especially novice or retail investors, need to keep in mind that in order for Bitcoin to move up or down 10%, billions of dollars in volume have to move. With most stock market analysts predicting another downturn based on unemployment numbers and unpredictability surrounding the coronavirus, the likelihood that the worst is yet to come is very high. At least if you believe what Goldman Sachs has to say about it.