This Crypto Crash Isn’t What You Think
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| bitcoin |
2022 was the year.
Cryptos were gonna prove their safe haven status. So what went wrong? And what can we learn from this? Well, thanks to the war in Ukraine, carnage in the stock market, inflation and interest rates, the traditional financial market is melting down before our eyes and taking crypto with it. But it wasn't meant to be like this.
Bitcoin is a safe haven, they said. Cryptos aren't linked to stocks, they said. Of course that wasn't true. So let's see what happened that led to the unfortunate link between crypto and the global financial market. And then we can see what the future might hold, giving you ideas on how you can protect yourself during all of this chaos. The correlation between Bitcoin and stocks is higher than ever. This was unthinkable in 2009. Bitcoin was born as a reaction to the 2008 financial crisis. We wanted a virtual currency with no links to banks or governments, and we got it. We wanted decentralized currency with no central authority, and we got it.
Bitcoin floated around in its own atmosphere for several years with price changes, mainly thanks to supply and demand. And sure, there were a few news stories swaying things along the way, but it looked like a perfect safe haven. Cut off from the world of stocks, commodities, interest rates, and inflation. Bitcoin was this beautiful island, and the choppy waters of the stock market just couldn't reach its sandy shores. At least that's what we wanted to believe. It couldn't last. Hold up, important announcement: It's finally here. After six months of work, I'm excited to announce Finova. Frankly, our group has outgrown Patreon.
We needed a platform to host all of our membership content in one easy to use place, and we did it. This includes trade signals, lessons from our six coaches, and posts from yours truly. And to kick this off, all new and existing users who move to the platform are eligible for our $10,000 giveaway, for real. $1,000 to ten different people. More information will be in the description below. I can't even tell you how stoked I am for this. Back to the video. The waves have finally crashed onto Bitcoin Island, causing fear and panic. So what changed? Part of the answer has to do with who was buying in the beginning of Bitcoin. The short answer here is people who believed in the technology, like, really believed in it. And that might seem obvious, but some things have changed. In the beginning, investors were people like this guy Kristoffer Koch. He spent $27 on 5,000 Bitcoin in 2009. Just imagine that. Now, he didn't hold much hope of it growing a whole lot in value and soon forgot that he even had these coins. So he had to frantically try to remember his password once the price started booming. And a few years after that, I actually purchased my first Bitcoin in 2013. And what's interesting is, at the time I didn't even consider it an investment. I just thought it was like this fascinating thing that I wanted to try out. And there are thousands of stories just like this. People buying who had no idea it could change their lives. They just believed that there could be might be a different way to build a monetary system. Dreamers and idealists? Yeah, sure. But this set the tone for the cryptocurrency world.
And guess what? The damn thing worked. Demand for Bitcoin flourished. New altcoins appeared, and it turned into this juicy Bull market that was exciting for everyone. This action attracted money hungry investors and people who wanted to balance our portfolios. And that's where things got a little bit weird. Suddenly, institutional investors who had no real interest in the founding principles of Bitcoin wanted a slice of the pot, for good reason: People were making money. Bitcoin was now seen as an asset class for growth rather than a safe haven or this idealist utopia. It was still risky, but it was worth the risk. A majority of British financial advisers advised their clients about crypto last year, with about half of those clients expecting to invest now. There's nothing wrong with that in itself. That's just what happens when something is a huge success.
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| All Bitcoin |
Ultimately, it's a good thing everyone takes interest in this new thing. It pushes up the price. We all feel like winners. However, the problems are now starting to surface when money is getting tight. Imagine you're an institutional investor or fund manager, and your stocks have tanked. Interest rates are skyrocketing, and inflation is scary high. Your clients are calling you, putting pressure on you, making you question yourself. And this crypto investment. What are you doing investing in crypto when the entire economy could collapse? So what do you do? You sell anything high growth or speculative. This is tech stocks, startups, and crypto. You go into safer assets and cash. None of this digital money existed during previous crashes, so no one's sure what it will do. And the last thing any fund manager wants to do is be the last guy holding the bag.
The fear, panic, and uncertainty just leads to more of that, a kind of negative feedback loop. In fact, many coins are now suffering more than stocks. Bitcoin island isn't looking so isolated anymore, and that's causing people to jump into the sea and get away, leaving 40% of Bitcoin holders underwater. It looks like things could get worse as we get deeper into 2022. So is there any good news that we can cling onto? The answer is yes, but first, I need to really quickly tell you about my sponsor, FTX. Besides helping me make these videos possible, FTX is the onestop shop for all things crypto and NFT. And better yet, they give you this at prices as much as 85% cheaper than competitors. Not cheap enough? Use a link in the description to get an additional 10% off for life, and you'll help out this channel while you're at it. Now, the link to stocks in the rest of the wider economy has pulled crypto under in the last couple of months or so. But the bear market isn't going to last forever. History tells us that bears last for a few months or maybe up to a year maximum, and then they get followed by a Bull market where the losses are recovered and then some.
So long term holding is generally the way to go. So stocks should recover. But will Bitcoin and the rest of digital assets do the same? This is the really interesting part. One theory is that the correlation we've seen so far will continue, or maybe even get stronger. As stocks rise again, those institutional investors and fund managers will feel more relaxed and start putting money back into crypto and will see that kind of sentiment sway and prices increase. This would lead to Bitcoin, Ether and smaller cryptos recovering at the same pace as stocks, or even possibly faster. Perhaps big investors will see that holding Bitcoin as a store of value makes a lot of sense. It can be argued that a lot of investors have successfully used crypto as an inflation hedge up until now, which might actually help explain why Bitcoin trading volumes went down once interest rates rose.
The suggestion here is that cryptos had already fulfilled their purpose as this inflation hedge, and now they're just not as necessary. The demand is lower. What's interesting is something similar happened to gold between 2012 and 2014, when its price crashed, due to its role as a hedge against inflation. Gold served its purpose and then later had less demand. The other option is that the link between these markets get broken. Perhaps the most dramatic example of the link between two markets being broken before is gold and the stock market. And there's good reason for it. Look at gold prices following the infamous 1929 stock market crash, it shot up dramatically when stocks plunged. Then gold carried on rising even as stocks recovered. Weird, right? The reason for this is people hoarded that precious yellow metal in the collapsing economy. Gold was a safe haven back then. But then something happened in 1934, sending gold prices plummeting. Countries worldwide moved their currencies off the gold standard, and the American government introduced the Gold Reserve Act. This forced citizens to exchange that precious metal for dollars. Stocks continued to go up and down for the next decade or so, but gold. Gold went on this long, deep, dark drop until it reached absolute rock bottom in 1970. People were no longer flocking to gold during bear markets, and it appeared to no longer be a safe haven asset. But that's when things changed again. Gold rocketed in the next decade, increasing by about 1000%. This was thanks to nervous investors who turned to it again thanks to inflation and uncertainty. But there was more to it because this also coincided with America abandoning the gold standard and letting citizens once again own their very own bullion. Since then, gold has been negatively correlated to the stock market and viewed as a safe haven asset.
Again, after a whole lot of flip flopping, it just took a ton of pain to get there. Now what about stocks and bonds? In the last century or so, stocks and bonds have had coinciding negative years just four times. That's a 4% chance that if you hold both assets, they will be negative in the same year. But what's different about those odd 4 years out of 100? The short answer is absolute panic. Far too many people pulling out of the monetary system all at once. Complete emotional overreaction. So where does this leave us with cryptos and stocks? Let's say mainstream investors cross cryptos off their list, or new regulation is brought in to restrict the purchase of those digital assets? Would it be like when all those Americans could no longer store gold? Where would this leave us? Possibly right back where we started. Bitcoin island. This utopia cut off from the rest of the global financial market. So that's terrible news for crypto prices, right? Maybe not. Let's not forget that this increased level of correlation with stocks has only happened recently.
Crypto was doing pretty well on its own before the recent carnage, and I'm sure it would do just fine on its own again in the future as well. After a bit of pain, of course. Now maybe this sounds a little bit too idealistic, but there could be a chance that this crash gives crypto back to the enthusiasts who really got it started in the first place. And sure, it's picked up a lot of new people along the way, and it's likely to pick up more in the future. But take this example of the Bitcoin family. They went crazy buying into Bitcoin as much as they could at $900, selling everything their home, their clothing.
They just wanted as much Bitcoin as possible. They then traveled around the world for a couple of years before moving to Portugal, as it's one of the few remaining European countries with no Bitcoin tax. This type of crypto enthusiasts isn't in it for the short term. But what I really mean is that this panic will whittle away to people who jumped in looking for a quick buck, and that leads to people who are genuinely believers of the power of the blockchain, hardcore enthusiasts, and people who distrust the mainstream financial system back to its revolutionary roots, if you like. Now, there's no reason to think that any of the things that put Bitcoin and other tokens on their insane rise to glory have changed. I don't think that this crash is about the intrinsic value of cryptos. It's about getting caught up in a falling market.
People who are scared of losing money, who are speculating on the tokens speculators don't want to buy right before a cliff. Breaking the link with the financial system might be the perfect long term outcome, but that doesn't mean it will happen, though it's probably more likely that cryptos get caught up in the currents and eddies of the mainstream financial world again. All of the major financial markets are related to one another. But these relationships are insanely complex and can change from one situation to another as we saw with Gold, that's why every bear market will just throw up new relationships, opportunities and problems to investors. And that's why you can never fully predict it.
Whenever all investors expect something to happen, you can bet that the opposite will pan out. It isn't always obvious what the relationship between these diverse markets are, but it's always there, lurking underneath the surface. Even if we can't see it. It's sure to be a crazy few months ahead, but just try to remember why you're investing and what your long term goals are. No one can predict the future, but by looking at the past and understanding the present, you can just have a better chance of keeping your cash as safe and sound as possible. Now, maybe the next question you're wondering is how do I make money in crypto without worrying so much about the mood of the overall market?