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After nearly three months of consolidation and falls, digital assets made a strong rebound in August. Despite the fact that the S&P 500 and Nasdaq Composite finished the month at all-time highs, Bitcoin and Ethereum were the true winners.
‘BTC and ETH vs. equities’ is an old and never-ending discussion, and the association between the two has become a very broad storyline over the years. While the differences between the two classes have been well-documented in the past, one theme that has been overlooked is the strong link between Bitcoin, other cryptocurrencies, and stocks.
Bitcoin, crypto, and stocks- It’s all related!
The market has been flooded with reports and analyses of how Bitcoin would remain unaffected by the larger market. However, that’s not entirely true. Take the March 2020 price fall, for instance.
Bitcoin and almost every other cryptocurrency felt the brunt of the same. After COVID hit the United States, the stock market had a big correction, and so did gold and Bitcoin. At that time, the SP500 dropped from its previous top by almost 35%.
It is in this context that the findings of a recent Ecoinometrics report should be read.
Since the pandemic began, more than $4 trillion has been added to the Fed’s balance sheet. This is more than they had in the 12 years that followed the 2008 financial crisis. In fact, almost $3 trillion was added to the Fed’s balance sheet in just a few weeks last year.
At the moment, while the figure is just above $4 trillion, it’s still counting.
The troubling fact here is that they did more in the twelve years following the 2008 financial crisis. While the financial markets were drowning in liquidity, the stock market set new highs.
For example, the SP500 is risen 34% from its peak before the March 2020 fall. In this instance, if the Fed stops producing money, there might be another liquidity crisis, and Bitcoin would not be immune.
Is Bitcoin becoming risky?
Now, according to the aforementioned report, if the “Fed is not flooding the market with always more liquidity, you are more likely to get bigger corrections.” Thus, since corrections larger than -10% are very likely to impact other markets, then that means if the Fed starts tapering, we increase the risk of seeing a negative impact on Bitcoin by 60%.
This could mean that if Bitcoin oscillates about $50k and the market experiences a >10% correction, Bitcoin could fall to as low as $20k.
With inflation running high, the Federal Reserve is expected to try to taper their purchasing programme at some time. When the Fed does not extend its balance sheet, the stock market is 30% more likely to experience a downturn greater than -5% and 60% more likely to experience a drawdown greater than -10%.
If this occurs, Bitcoin may fall to lower levels, sending the entire crypto-market into a frenzy.