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Bitcoin: Stock market correlation or restarting hype?

Bitcoin shot up impressively to pre-corona levels. Is the hype back now?

bitcoin-20200430

Two weeks after the stock market started to react to the corona virus, correlation between stock and crypto markets suddenly increased and bitcoin experienced a dramatic crash. The safe haven status that bitcoin enthusiasts liked to proclaim got severely shattered. A free fall of fifty percent in two days doesn’t look safe, especially not for something that still wants to be a currency!

On the other hand, bitcoin came back. Of course, as the chart above demonstrates, probably only with the help of a rising stock market. If it is not stable enough to be a currency, may it be at least a secure store of value that is just a little more volatile than something like gold?

Time will tell, but so far bitcoin came back always. It also climbed during ten years by a factor of more than 100000.

Factor 100000? Looks like a rather good store of value!

The question for now seems to be, will stocks tank again? For me the answer is: Yes, but not necessarily immediately.

For one, the pandemic hasn’t ended yet. The stock market just likes to pretend something like that, which is probably caused by a mixture of these perceptions:

  • The economy got saved by the Fed and other central banks with mountains of money.
  • Printing that much money will devalue real currencies over time and create inflation, which should help the stock market (and also bitcoin).

Unfortunately both things don’t have to do anything with the real threat of the virus and its future development.

The markets seem to anticipate that there will be only a single wave of infections and that, just because some countries seem to be behind the crest of the wave, others will follow necessarily so that the pandemic is forecastable.

Thinking that China has stopped the virus and is now in the process of reopening the economy as if nothing has happened and that that will work elsewhere, too, is naive.

Reality will likely be much more complex and thorny!

Second and third waves will occur around the world reigniting the next waves in other countries. Social distancing, closed borders, and other measures will flatten the waves and decrease new infections, but also prolong the whole process until most people are immune.

Without combating the virus with isolating measures the waves might get much higher and with them the fight might last much longer than a few months. Finding a vaccine seems to be our best chance, which still means freedom-curbing and economy-slowing measures for a long time.

Given this outlook, it seems to be clear that many jobs and small businesses and even some larger ones will have been irrevocably destroyed after our society will return to normality. And that alone should be enough to rock the economic world for a longer time. Perhaps there will also occur liquidity problems despite the Fed money. In any case, our productive base will get partly damaged.

Conclusion: The economy will most likely crash much more than the stock market currently seems to be telling us.

Regarding the second item, the upcoming inflation, one just has to ask questions like:

  • Which company will want to invest right now or in the near future?
  • Will consumers buy as they were used to?
  • What about traveling and tourism or just visiting a bar or a restaurant?

Money will refuse to flow. It is not inflation, which will endanger the economic world. For now the problem will be deflation with the exception of specific shortages caused by the pandemic.

The global economy wasn’t in a healthy state before the virus hit the world. Global trade was threatened by Trump and a European Union that eventually may disintegrate further beyond the loss of the UK. Then the virus crushed all forecasts of earnings, prospects of growth, business plans, and even many personal hopes.

Similar to ringing a bell there will be a reverberation.

But, the markets are a complex system, which will react nonlinearly to the virus punch. The pandemic itself is, of course, also a highly complex system. There will not be a smooth resonation like a church bell calmly getting quiet and fainting into silence! During the course to economic normality all sorts of unforeseeable things may happen.

So, likely there will be more to come. A crash is something that is not foreseeable, otherwise it wouldn’t occur suddenly. We should expect some nasty market (re)actions in the future.

What does that mean for bitcoin and other cryptos?

It looks plausible that with a new downturn of the stock market the newly found correlation will also drag bitcoin down.

As usual there are other reasons why it could move on its own:

  • The current jump could be caused by short sellers that were forced to cover their position, which means the move is short-lived.
  • It also could have been ignited by the upcoming halving in about ten days, which will reduce the stream of bitcoins that go to miners by fifty percent. Miners sell some or most of their earned coins to cover their production costs. Generally one can expect that this ongoing “excess” supply gets diminished over time and long-term investors have to buy less to compensate that influx so that bitcoin can reach a supply-demand balance at a higher price. For short-term considerations this halving event may either be priced in or still have a “magnetic” effect. Traders think that other traders think… and that starts a self-fulfilling prophecy. Whales could even try to trigger actively such an autocatalysis by initiating the start or they try to get early into such a move, which would make them part of the self-feeding trend. Bitcoin’s price behavior of the last days suggests something like that. Essentially this means the current move may also be short-lived if after the next few days no late buyers show up and selling the news starts.
  • Bitcoin was in a longer consolidation before dropping violently. Buyers were cautious back then and that may have changed not. It still may be hard to reach and break the high of about 13800 from June one year ago.
  • During the current crisis bitcoin first showed a panic reaction, but then behaved somewhat robust. Now that central banks threaten to devalue fiat currencies, bitcoin could have gained a new status. It may not be the short-term safe haven due to its volatility, but it may be seen as a safe haven in the long run against devaluation by inflation and that would be a store of value quality.

All that doesn’t mean you shouldn’t trade bitcoin right now. The trader who tries to get on board at all times will eventually be in when the next big move starts and magically mutate into an investor, temporarily at least.

The bitcoin flight to the moon could have been restarted already right now or bitcoin could be dragged back by other markets or self-related forces in the near future.

Bitcoin could, of course, also fade into oblivion or being superseded by other promising altcoins in the more distant future.

That’s the nature of the momentum monster.

Thu, 30 Apr 2020 by TS


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What is Zen trading?

Zen traders, as I am going to define them here, know many different trading styles and methods. But they all have these two characteristics in common:

  • Zen trading means using a relaxed, automated, and or natural way of doing a trade or an investment. Going with the flow is usually not only convenient, but also extraordinarily rewarding.

  • Zen trading does not mean some esoteric way of predicting the future.

Let's start with two of these methods. They happen to be the bread and butter of a Zen trader:

The Zen system for short-term traders of all markets. This is also the more elaborated system for getting safely on board of a long-term trend as a replacement of the simple but robust system of the investo-trader method below:

PIPDAQ setups
for the efficient trader


The Zen system for "investo-trading" the stock market. Works also well for cryptocurrencies.

Darvas + Livermore = The Trend Investor

Does Zen trading mean that you have to know it better than others most of the time? No, Zen traders need quite some trades to enter some huge winners. They are no wizards. They just look to others as if they were.

And here it comes:

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Long living market sync for you,

TS