The Capital
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The Capital

Stock Market Crash Imminent, How Will Bitcoin React?

By Edward Valencia on The Capital

Many people might wonder why the stock market is reaching all-time-highs when the economy is down the drain. Those who understand macroeconomics will tell you that the Fed and government will do whatever it takes to prevent another great depression. It’s important to understand that although their actions are relieving some of the economic pressure in the short-term, what their doing is creating a greater problem in the long-term.

After the 2008 crash, the Federal Reserve bought up toxic assets and pumped the market with liquidity calling it ‘quantitative easing’. Many people don’t know that these assets still remain in their balance sheet and it was only until two years ago that they started to unload them. With their balance sheet up to its neck and interest rates already in all-time-lows, there’s nothing much to do. The Fed is practically throwing whatever they can at the economy and hoping something sticks. So far they’ve gone through massive bailouts for companies and the government itself. Unfortunately, it hasn’t been much use.

The Fed attempts two goals that they’re bound to, 1. low unemployment and 2. steady inflation. For years the Fed has had their eyes on 2% inflation every year and their worst nightmare is a deflationary environment. This is why the Federal Reserve has announced that they are aiming for inflation higher than 2% to offset much of the deflationary activity we’re currently experiencing.

Legendary investor Warren Buffet has gone back from his bullish optimism. Buffet has trimmed his positions in U.S. banks, airlines, and other staple institutions. His anticipation appears to be grimly taken by the fact that he entered into a large position in Barrick Gold (GOLD). This miner company is the second-biggest precious metal miner in the world.

Apart from his intuition, the indicator named after the famous investor is signaling red. The Buffet Indicator, measuring the ratio of the Wilshire 5000 Index and the GDP of the U.S., has hit an exuberant number of 1.7. The historical average of the indicator is 1 and 1.3 indicates that stocks are “fundamentally overvalued.”

Our current level may indicate that there is a steep downtrend in the stock market ahead.

Bitcoin has been an asset that has been too new to determine where it belongs. In the short-term, we see correlations with the stock market and in the long-term, we see it with gold. This is to be expected due to the the fact that it’s only 11 years old. We are unable to predict how BTC will react in an economic downturn but logic will tell you that it’s bound to outperform safe haven assets like gold in the long-term.

The correlation between Bitcoin and gold. Source: Skew.com

Investors that truly stand by bitcoin will continue to hold the digital asset as long as institutional investors continue to flock in, the Fed keeps aiming for high inflation and keeps interest rates low and the government continues to stimulate the economy.

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