Can bitcoin and cryptocurrencies be a protective asset during a recession?
Cryptocurrency during recession.
With this material, we continue the series of articles on the correlation of cryptocurrencies. In the first article, we focused on the correlation of Bitcoin with other coins, in the second article, on the relationship between the cryptocurrency and the traditional market. For a more complete understanding of the topic, we will figure out what factors affect the capitalization of cryptocurrencies.
The inflow of capital to the cryptocurrency market occurs when investors want to ignore all kinds of risks. Otherwise, there is a decline in the market. For many people, this seems like something unrealistic, but the way it really is. This dependence is poorly expressed, but it exists and provides some food for thought when forecasting interest in cryptos.
Let’s try to visualize how investor interest in risk is changing. In the indicator that we show below, we will include the dynamics of changes in the cost of raw materials and gold, the capitalization of the largest stock markets and the level of government bond yield. Using information on mood swings in the market, we will find out how this factor affects the value of “digital gold” (Bitcoin was taken only because it is the main cryptocurrency in the world).
Below you see the corresponding histogram (study period: August 2017 — February 2018). An increase in indicators means a panic in the market and an escape from risk, a decrease in indicators — increased demand for high-risk assets, which in the long run can bring good income.
For greater clarity, a pivot point and a five-day midline are shown (due to the fact that the histogram is not smooth).
The received signals are plotted on a bitcoin chart. We see the following:
We get what we told you above: Bitcoin fluctuations correlate with fluctuations in market sentiment. Another interesting point that for some reason no one pays attention to is that investors consider Bitcoin a protective asset. Let’s talk more about this phenomenon.
A defensive asset is an asset where investors transfer their capital during financial turmoil. The main goal of this action is to protect capital from serious losses and wait out the period of time during which the market falls. Many people know that one of the most protected assets are gold, currencies of financially stable countries (for example, Switzerland or Japan), bonds. Most often, a capital during financial shocks goes there. The cryptocurrency market, in turn, is considered by some to be more risky, but at the same time more profitable, which is undoubtedly important for investors. However, this is a slightly false statement. Bitcoin’s behavior is the opposite. If an investor sees a danger to his assets in the form of, for example, a slowdown in the global economy or the prerequisites for a financial crisis, he will transfer his capital to Bitcoin. Cryptocurrency during recession
In previous articles, we proved that cryptocurrencies have a positive correlation. This tells us that the entire cryptocurrency market will grow with external problems.
To summarize the above, we note that big capital sees a protective platform in the cryptocurrencies market where it is possible to preserve and even increase its savings during a period of financial instability and it can be probably in cryptocurrency during a recession. The cryptocurrency market is the real antagonist of the modern financial system, so if you see that a serious financial cataclysm is approaching, then this is another reason to think about transferring funds to this area.
This article is not a recommendation for investment or investment in cryptocurrency, as well as perceived as investment advice. Be careful, because investing in cryptocurrencies is very risky and you need to consult with your financial advisor. Past earnings do not guarantee future earnings.
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