One of the reasons for the volatility of Bitcoin (BTC), the large price fluctuations that occur regularly, is inconsistency in the areas of use. Some critics consider it “digital gold”, a truly rare and ideal store of value. Others see Bitcoin as a technology project or some kind of program with a similar network.
El Salvador’s acceptance as legal tender is likely evidence of the barter offered by the Lightning Network. The Layer 2 scaling solution allows instant and frivolous transfers, even if regular chained transactions are required to enter or exit this parallel network.
As these stories about Bitcoin change over time, so does the correlation between BTC and traditional assets. For example, there have been long periods of strong correlation with gold.
Bitcoin vs gold (precious metal) in 2020. Source: TradingView
The March 2020 crash was devastating for almost all asset classes, but the recovery pattern that followed six or seven months was pretty much the same for gold and bitcoin. Ironically, the opposite movement took place in 2021 and showed an inverse relationship between the two originals.
Is Bitcoin a technical exchange agent?
On the other hand, according to the Hang Seng Index, Bitcoin has begun to mimic the Hong Kong stock market. Key components include Tencent, Alibaba and Meituan, multibillion-dollar Asian tech companies.
Bitcoin vs Hang Seng Index (action). Source: TradingView
This shift in investor thinking – from tracking gold prices to technology stocks – raises the question of whether Bitcoin will succumb to the Hang Seng downtrend seen over the past 90 days. Does it make sense to be apart now? If so, will Bitcoin continue to serve as a safe haven amid the overall correction?
On Tuesday, the Evergrande Group, China’s second-largest real estate developer, announced that a significant drop in sales had forced the company to default on its debt. This company has more than $ 300 billion in debt, which analysts say could have a serious impact on the market as a whole.
In August, retail sales in China disappointed 2.5% from the prior year, as investors were expecting 7% growth. It’s clear that growth and the economy have been hit hard in 2020 due to the government’s response to the coronavirus outbreak.
However, it should be borne in mind that the most influential central banks have been practicing near zero or even negative interest rates since the first quarter of 2020. This is a general correction in the stock market and potential losses in the debt markets.
The problem is that bitcoin may be 12 years old, but it has never faced a major economic crisis, at least nothing that would jeopardize more than $ 250 trillion in global debt markets. Therefore, it is unlikely that any analysis or estimate will lead to a reliable estimate.
Bitcoin may suffer less from market disruptions
However, conventional cryptocurrency has an edge over traditional markets such as commercial real estate, stocks, and bonds. Lenders will exclude these assets if customers do not meet their payments, and this will increase pressure because the bank or institution has no interest in holding them.
On the other hand, bitcoins and cryptocurrencies generally cannot be used as security.
When it comes to making billions of dollars in bitcoin futures in the derivatives markets, these are just synthetic instruments. These events will undoubtedly affect the price, but ultimately BTC will remain active on the derivatives exchange. It only goes from a long account (buyer) to a short account (seller).
Until Bitcoin fully gains a foothold in the financial markets and is accepted as collateral and deposits, the systemic risk of cryptocurrency in the medium term will be lower than in the traditional market.