How Will Bitcoin React If Traditional Markets Do Experience the Next Global Crisis?
The crypto community is divided right now. Some people, mostly the investors who are interested in taking Bitcoin to the mainstream at any cost and to see prices going up, are hoping that the institutional investors decide to jump in and start investing in BTC. Other people from the community, mostly hardcore investors, are against this idea.
Now, some people from the second category are saying that the ones from the first are not seeing an imminent danger: Bitcoin if gets too close to the mainstream financial market, it could be affected when they go down.
You may remember Satoshi’s prophecy. It was 2009, just after the great financial crisis, and he said that Bitcoin would be the revolution of value. However, in order to detach itself completely from the financial market, you need to… well, detach yourself from that market.
This is the opposite of what is happening right now, as anyone can clearly see. Bitcoin is slowly but steadily seeing new institutional investors and they are very heavily tied to the financial market.
Now, if the Wall Street-based financial market goes down, will BTC fulfill its promise or will it be dragged down together? Cryptos have been detached from the stocks market so far, but this is mostly because they were only bought by retail investors.
Nobody knows what will happen when institutional investors are finally strong in this industry. Economists like Alex Kruger believe that dynamics could shift a lot soon and that BTC and the Dow Jones stocks will have a lot more in common than we thought in the future, despite the decentralized nature of cryptocurrencies.
The Bitcoin community will be shocked, Kruger affirmed when they discover how Bitcoin will provide very little safety during the next financial crisis. If BTC becomes a highly correlated asset, you simply cannot use it for diversification at all.
Crypto And Institutional Investors
Basically, the problem starts exactly because people hope that cryptos could be a way to diversify funds, Kruger explained. Many institutional investors are starting to buy into this narrative. However, this can be a “double-edged sword”, as the economist explained.
Institutional capital is often seen as the savior of crypto. You should remember that this is a new industry, though. If you get a lot of money from investors that are from the traditional industry and you simply have not developed all the tech that you need, what will happen in a recession is that cryptos will simply be another asset and they will suffer the same effects.
Kruger highlighted how Bitcoin is very new and it is far from mature at the time. This makes the correlations get stronger when the players start to enter this new space. Before too long, the correlation can simply get “too big”.
About Bitcoin And Altcoins Decoupling
An interesting point was recently raised by Vinny Lingham, the CEO of the Civic platform. According to the entrepreneur, BTC is very coupled with altcoins. If BTC goes up, they go up and vice versa. This means that you have an asset which already has a high correlation with other markets.
It is not impossible, therefore, for BTC to be accepted as an asset in the traditional industry and become more widely accepted there, which would make more similar to them, despite its decentralization. This could affect prices.
The truth is that this is a very difficult situation. Institutional money is desirable, so this is a risk that most people in the crypto industry, especially the ones with high stakes in it, are ready to have.