One of the reasons for Bitcoin’s (BTC) volatility, the substantial price swings that occur on a regular basis, is the divergence of its use cases. Some experts consider it “digital gold”, a truly rare and perfect store of value (SoV). Others see Bitcoin as a technology project or a type of software with a corresponding network.
Adopting 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 inexpensive transfers, although it requires regular on-chain transactions to enter or exit this parallel network.
As these Bitcoin narratives evolve over time, so does the correlation of BTC with traditional assets. For example, there have been prolonged periods of strong correlation with gold.
The March 2020 crash was devastating for nearly every asset class, but the pattern of recovery that followed those six or seven months was virtually identical for gold and Bitcoin. Oddly enough, the reverse movement occurred in 2021, showing an inverse correlation between the two assets.
Is Bitcoin a technological stock market proxy?
On the other hand, Bitcoin has started to emulate the Hong Kong stock market, as measured by the Hang Seng Index (HSI). Among its main components are Tencent, Alibaba and Meituan, which are billion dollar Asian technology companies.
This shift in investors’ perspective – from tracking the price of gold to tech stocks – raises the question of whether Bitcoin will succumb to the Hang Seng downward movement seen over the past 90 days. Does it make sense to decouple now? If so, will Bitcoin continue to act as a safe haven amid a general correction?
On September 14, China’s second-largest real estate developer, Evergrande Group, announced that a significant drop in sales had forced the company to defer payments on its debt. That company alone has over $ 300 billion in liabilities, which analysts say could seriously affect the overall market.
China’s retail sales in August disappointed at 2.5% from a year earlier, when investors expected a growth rate of 7%. Clearly, growth and the economy have been heavily impacted in 2020 by the response of governments to the Covid-19 epidemic.
However, it must be considered that the most influential central banks have been practicing interest rates close to zero or even negative since the first quarter of 2020. Thus, if the economy fails to gain momentum in the midst of several multi-trillion dollar stimulus packages, there is not much to do. done to avoid a widespread market correction and potential losses in the debt markets.
The problem is this: Bitcoin may be 12 years old, but it has never faced a major economic crisis, at least nothing that puts global debt markets in excess of $ 250 trillion at risk. Therefore, any analysis or estimate is unlikely to produce a credible assessment.
Bitcoin could be less impacted by a market collapse
However, cryptocurrency has an advantage in traditional markets like commercial real estate, stocks, and bonds. Lenders will seize these assets if customers fail to make their payments, which adds additional pressure as the bank or institution has no interest in keeping them.
On the other hand, generally speaking, Bitcoin and cryptocurrencies cannot be used as collateral.
When it comes to billion dollar Bitcoin futures contract liquidations on derivative markets, these are just synthetic instruments. Without a doubt, these events will impact the price, but ultimately the actual BTC remains on the derivatives exchange. It only switches from the long (buy) balance to the short (sell) account.
Until Bitcoin is fully entrenched in financial markets and accepted as collateral and deposits, the medium-term systemic risk for cryptocurrency is lower than in the traditional market.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of TBEN. Every investment and trade move involves risk. You should do your own research before making a decision.