Is Bitcoin a good hedge against a Stock Market crash?
As Bitcoin becomes more popular, many comparisons are being made between it and more traditional markets like the stock market. One common topic is what would happen to Bitcoin if say the stock market dropped in value significantly, if it 'crashed'.
Below we go through this, first explaining common arguments for why the stock market might crash, and then listing arguments for and against if Bitcoin is a good hedge against it.
Will there be another stock market crash?
When comparing Bitcoin to the stock market, it's important to first be aware of why people think the stock market will crash. Common arguments include:
- When comparing the total value of the Wilshire 5000 US stock market index with the GDP of the US, the money invested is actually higher (this relationship is called the 'Buffett indicator'). Many consider this a sign of an upcoming crash.
- Many consider the 'bubble' in the home real estate market back in 2008 to have been correlated to the stock market crash. Now in 2018 it would seem several US cities are again approaching bubble territory (specifically San Francisco and Los Angeles), which may indicate both an upcoming housing price drop and stock market crash.
You should research each of the arguments above yourself, keeping in mind that many of the people arguing for and against each are very biased.
Bitcoin Price vs stock market crash
There are countless posts around what would happen to Bitcoin's price in the event of a stock market crash, but when you look through all these many of them use the same arguments. Below we list these arguments, both for and against Bitcoin being a good hedge against the stock market (so you can make a more objective decision about it yourself).
Arguments for Bitcoin being a good hedge against the stock market
- In late 2017 many prominent people claimed that stock market investors were moving their assets to Bitcoin, and so the effect would be that as stock market prices decrease Bitcoin's price increases. With Bitcoin's price dropping a lot over 2018 this argument is no longer as common (and some people who said this actually withdrew it).
- In late October 2018 Bitcoin's price has been very stable, with some considering it more stable than stocks like Apple, Amazon and Netflix (be aware that this is a very short-term claim though, where earlier in October Bitcoin dropped in price significantly and then increased again a few days later; many suggesting that the stability won't continue for much longer, that Bitcoin's price will soon be more unstable again).
Arguments for Bitcoin being a bad hedge against the stock market
- When looking at the VIX (volatility index) of Bitcoin, also known as the 'fear index', it looks to be inversely correlated to Bitcoin's price, which suggests that as fear in markets increases Bitcoin's price decreases; and as fear decreases Bitcoin's price then increases. So in the event of a stock market crash where fear would be very high, this suggests that Bitcoin's price would drop.
- There have been articles posted around countries like Venezuela having very serious inflation (referred to as 'hyperinflation'), and that because of this people in these countries have been moving their money into Bitcoin - as even if Bitcoin's price drops, they'd consider it a less risky store of value than their own currency. Sometimes this same argument is used to relate Bitcoin to the US stock market, but many counter this arguing that the two scenarios are very different. Although the USD does decrease in value each year, it's a lot more stable than countries like Venezuela, and so this argument doesn't apply (e.g. someone trading on the US stock market looking to protect their investment would use USD rather than Bitcoin).
- Some argue that because Bitcoin is such a speculative investment, if there were a stock market crash, that money would be moved to more 'conservative' assets like gold and bonds rather than Bitcoin (and that even Bitcoin investments themselves would be moved to gold, bonds, etc.).
- A number of prominent people have claimed that Bitcoin's correlation to the stock market is insignificant, and so regardless of if you want to invest in Bitcoin or not, you shouldn't see it as a hedge against a potential stock market crash (e.g. the correlation isn't positive or negative, these people argue that it just isn't correlated to begin with).
- Some argue that before they can determine if Bitcoin is a good hedge, the stock market would have to see a big crash. So rather than using it to hedge against the next stock market crash, it may be used for a future crash based on the outcome of the next one. Some people counter this arguing saying that in smaller crashes like back in February 2018, Bitcoin's price actually fell at the same time that stock market prices fell. Others then counter this again arguing that during recent poor stock market performance in late October 2018 Bitcoin's price remained very stable. In general you can find data to support both sides here, so you should consider any arguments based on past performance to be very subjective.
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