Stock equities and bitcoin have recently been following each other pretty closely. This has led many to conclude that this sort of peg will last forever. And in this article, we will cover why the peg between the price of bitcoin and stocks will likely remain for the near-term future.
Bitcoin and Stocks – It Hasn’t Always Been This Way
The relationship between the price of bitcoin and stocks did not always exist. In fact, it only began to really take shape in 2020 with the coronavirus pandemic and unprecedented quantitative easing.
Before that, bitcoin operated mostly independently of the stock market. The reason for that is rather simple.
Bitcoin was viewed as “magic internet money” or some sort of scam by Wall Street before that point. This meant that the price was driven mostly by retail investors getting excited by price increases.
In other words, the main reason people invested was because they read people made a lot of money on the internet and wanted to join in on the action (fear of missing out). It was never viewed by most people as some sort of replacement for gold or an ideal place to park spare cash.
As the next section will cover, that all changed in 2020. The short of it Bitcoin is finally viewed as a legitimate commodity and not “magic internet money.”
Bitcoin Becomes Mainstream
Bitcoin finally became mainstream in 2020. We suppose this was inevitable with early proponents making the digital gold comparison.
However, that view of Bitcoin did not become mainstream until 2020. So, what changed in 2020?
Specifically, it was unprecedented government spending to mitigate the effects of the global pandemic that caused the world economy to slow down.
Now, government spending is equated with inflation. And inflation means the last thing you want to hold is cash because the value of it will decrease. On a similar note, central banks also cut interest rates on government bonds. 10 year US Treasury bonds currently have a 1.6% interest rate.
Basically worthless after inflation is factored into the equation.
What does this mean?
All the liquid cash had to go somewhere. Typically, it goes into stocks, real estate, and other assets.
Assets generally increase in nominal value in times like that because of inflation.
What happened this time is that Wall Street finally viewed bitcoin as an asset worth investing in like stocks, gold, or real estate.
Why Did Wall Street Start Liking Bitcoin in 2020?
The exact answer will likely remain unknown forever. However, a likely reason has to do with the resilience of Bitcoin.
It survived the bear market from 2018 to 2020 and multiple bear markets before that. Not to mention that MicroStrategy, a publicly traded technology company, added bitcoin to its balance sheet in 2020 to much success.
It’s also important to note that bitcoin is much easier to invest in for a company than something like gold or real estate. A company can actually put “physical” bitcoin on its balance sheet with a few clicks of the mouse.
Gold is a little more difficult to add to a balance sheet. The price of gold has also remained fairly steady over the past few decades whereas bitcoin has seen tremendous growth.
It simply makes more sense for a company to invest in a well-performing asset like bitcoin rather than a fairly stagnant asset like gold.
Is Bitcoin Forever Pegged To Stocks?
Yes, bitcoin will likely remain pegged to stocks as it has finally received mainstream acceptance as a viable place to store cash to mitigate the effects of inflation. There is very bullish sentiment on Wall Street right now surrounding bitcoin. Gold is out; bitcoin is in.
This does not really have to do with bitcoin so much as it is related to the general lack of alternatives for cash to flow. There simply is nowhere else to park money outside of stocks or real estate, many view both as overpriced, so money has begun flowing into bitcoin as if it’s another asset.
To that, we’re happy. Bitcoin has finally received the acceptance that many have been waiting on for over a decade.
What Happens When The Quantitative Easing Stops?
As we mentioned previously, much of the price surge in bitcoin is due to a large amount of quantitative easing (read: money printing). Cash has begun flowing into bitcoin and stocks.
However, this does raise the question about what happens when all the money printing stops.
Well, bitcoin has been following stocks for some time now, so it’s reasonable to assume that the price of bitcoin will follow stocks in that scenario.
Stocks generally decrease in price when money printing stops, which is what we expect to happen to bitcoin.
We will say that the price pullback will likely be smaller than previous bitcoin pullbacks. And it will more likely than not return in price when central banks resume printing money and/or cut interest rates.
Well, that covers it for the apparent bitcoin peg to equities. It’s a result of unprecedented money printing and investors looking for a profitable alternative to equities and real estate to park their cash.
That alternative has clearly been Bitcoin.
We do not expect this trend to stop anytime soon – for better or for worse. Bitcoin is here to stay as a legitimate alternative to the stock market.