One of the reasons for the volatility of Bitcoin (BTC), the significant price fluctuations that occur regularly, is the discrepancy between the use cases. Some experts consider it “digital gold,” a really scarce and perfect store of value (SoV). Others consider Bitcoin to be a technology project or some kind of software with a corresponding network.
The adoption of El Salvador as legal tender will likely prove the functionality of Exchange Means (MoE) that the Lightning Network provides. The Layer 2 scaling solution enables instant and insanely cheap transfers, but requires regular on-chain transactions to enter or exit this parallel network.
As these narratives about Bitcoin change over time, the correlation of BTC with traditional assets also changes. For example, there have been sustained periods of strong correlation with gold.
The March 2020 crash was devastating for almost every asset class, but the recovery pattern that followed those six or seven months was virtually the same for gold and bitcoin. Oddly enough, the opposite move occurred in 2021, showing an inverse correlation between the two assets.
Is Bitcoin a Tech Stock Proxy?
Bitcoin, on the other hand, began to mimic the Hong Kong stock market as measured by the Hang Seng Index (HSI). Major companies include Tencent, Alibaba, and Meituan, which are multi-billion dollar Asian technology companies.
This shift in investor perspective – from tracking the price of gold to technology stocks – begs the question of whether Bitcoin will succumb to the Hang Seng downward movement of the past 90 days. Does it make sense now to decouple? 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 sharp drop in sales had forced the company to postpone payments on its debt. This single company has over $ 300 billion in debt, which analysts say could have a significant impact on the broader market.
In August, China’s retail sales disappointed 2.5% year over year, where investors were expecting a 7% growth rate. Apparently, growth and the economy in 2020 have been severely impacted by the governments’ response to the Covid-19 outbreak.
However, one has to keep in mind that the most influential central banks have been practicing interest rates close to zero or even negative interest rates since the first quarter of 2020. So, if the economy does not get going amid a multi-trillion dollar stimulus package, there is not much that can be done to prevent a general stock market correction and potential losses in the bond markets.
The problem is: Bitcoin may be 12 years old, but it has never seen a major economic crisis, at least nothing that threatens the over $ 250 trillion global debt markets. Therefore, any analysis or estimate is unlikely to yield a credible assessment.
Bitcoin could be less affected by a market meltdown
However, the cryptocurrency has an edge over traditional markets like commercial real estate, stocks, and bonds. Lenders will foreclose these assets if customers fail to make their payments, and this adds to the pressure as the bank or institution has no interest in keeping them.
On the other hand, Bitcoin and cryptocurrencies in general cannot be used as collateral.
In terms of the multi-billion dollar liquidations of Bitcoin futures in the derivatives markets, these are just synthetic instruments. Undoubtedly, these events will affect the price, but at the end of the day the effective BTC remains on the derivatives exchange. It only moves from the long account (buyer) to the short account (seller).
Until Bitcoin is fully anchored in the financial markets and accepted as collateral and deposits, the medium-term systemic risk for the cryptocurrency is lower than in the traditional market.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.