Right now it feels like a critical time in the markets. Bitcoin has dropped 65% over the course of the year, and we appear to be at a watershed; analysts are divided between the idea of a renewed uptrend, vs the danger of the market taking another leg lower. Meanwhile there are an increasing number of warnings about the stock markets and the global economy. The Dow has recently ‘corrected’ sharply, though we’re not yet into true bear market territory. Analysts here too are split between whether the pain is over for now and stocks will continue to rise, or whether there is more to come.
Which way the mainstream markets go will likely have significant bearing on crypto. As we’ve argued, crypto may no longer be uncorrelated to the stock markets, but neither is it treated exactly the same, as another risk-on asset.
And so it appears that at some point soon – within 12-18 months at most – we will see a stock market rout. In the same time period, bitcoin is widely forecast to pick up, powered by the shiny new infrastructure coming online at the end of this year and beginning of 2019, facilitating waves of institutional cash. The timing of the first will have a high degree of impact on the second. We broadly see three different scenarios.
1) The Dow tanks, crypto tanks
Should confidence in the US stock markets fail soon (i.e. this year or early 2019), then traders will be taking heavy losses. Bitcoin is more correlated with stocks than it used to be, and traders won’t be feeling wealthy enough to take a punt on BTC – they’ll adopt a risk-on approach and hedge in cash or gold. This could kill or delay a nascent rally in bitcoin, as institutions wait for more favourable conditions.
2) The Dow (temporarily) rallies, crypto rallies
With the Midterms out of the way, markets have greater certainty – and, indeed, the split in Congress is broadly favourable to Wall Street, curtailing the riskiest excesses of the Trump presidency while maintaining a light touch for businesses. If the stock markets continue to rise, then it’s reasonable to expect traders to start funneling some of their gains into bitcoin – which will not only start to appear underpriced, but will have those all-important on-ramps. That could push BTC significantly higher over the course of next year – though, of course, at some point the stock market will top out and then the party would most likely end for crypto too.
3) The stars align
Should the two market cycles occur out of phase, we could be in for something more dramatic. A rally in the Dow might not coincide with a bitcoin bull market; it may still be too early for that. If there was a period of further consolidation, it’s possible that bitcoin might start its next rise when the Dow is already much higher. If, however, bitcoin was gaining momentum as the Dow topped out, we might see a huge round of profit-taking and the money being pushed into crypto in the biggest FOMO bull market yet.
We know that markets move in cycles, and that both the global stock markets and crypto are due for a change in trend. Precisely when and how that happens could have some far-reaching consequences.
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