While Bitcoin competes favorably with traditional financial assets, one question remains: what is the fate of Bitcoin in the event of a market crash?
This is one of the concerns Bitcoin skeptics have latched onto to sustain cynicism. These skeptics believe in traditional assets because they have over time shown their resilience in the face of market turmoil. However, such trust isn't extended to Bitcoin and other crypto assets because of their high volatility.
In this article, we will explore the relationship between Bitcoin and market crashes, and look at the underlying factors that could influence Bitcoin.
Before answering the question about Bitcoin’s price movement in a market crash, it is best to look at an overview of Bitcoin’s performance in notable market crashes. Understanding how Bitcoin has responded to various economic crises provides valuable insights into its behavior during turbulent times and helps investors make informed decisions. Examining historical events, such as the 2008 financial crisis, the European debt crisis, China's market crash in 2015, the Brexit vote in 2016, and the COVID-19 pandemic, illuminates the patterns and trends that have characterized Bitcoin's journey through economic uncertainties.
During the 2008 financial crisis, Bitcoin did not yet exist as it was introduced in January 2009. Traditional financial markets experienced a severe downturn due to the collapse of Lehman Brothers and the subsequent banking crisis. Bitcoin, born out of the desire to democratize finance and offer financial freedom, emerged in the aftermath of this crisis. Satoshi Nakamoto designed it as a response to the failures of the traditional banking system during the 2008 meltdown.
Bitcoin started gaining traction during the European debt crisis. While not a market crash per se, this period was marked by economic uncertainty and volatility in traditional markets. Bitcoin's decentralized nature and the growing distrust of traditional financial institutions led to increased interest in the cryptocurrency. Its value remained relatively stable during this time, showing its resilience in the face of economic uncertainty.
In mid-2015, China's stock market experienced a significant crash, affecting global markets. Bitcoin, being a borderless digital asset, attracted attention from Chinese investors seeking alternative investments amid the crisis. This increased demand led to a notable surge in Bitcoin's price, showcasing its potential as a safe-haven asset during regional market uncertainties.
The United Kingdom's vote to leave the European Union (Brexit) in 2016 caused shockwaves in financial markets. Bitcoin's price experienced a moderate increase as investors turned to alternative assets, including cryptocurrencies, to hedge against the volatility surrounding the event. This demonstrated Bitcoin's appeal as a store of value during geopolitical uncertainty.
The COVID-19 pandemic triggered a global economic downturn, leading to significant market volatility. Initially, Bitcoin's price mirrored traditional markets, plummeting in March 2020 during the height of the pandemic. However, Bitcoin's recovery was swift and remarkable. Institutional interest and growing mainstream acceptance contributed to its resilience. Bitcoin's price rebounded, outperforming traditional assets, and establishing itself as a potential hedge against economic uncertainties.
Post-COVID-19, factors like regulatory developments, technological advancements, and institutional adoption continued to influence Bitcoin's price. While it remains volatile, Bitcoin's performance during subsequent market fluctuations suggests that it is increasingly perceived as a viable investment option during uncertain times. Its ability to adapt and thrive in different crises has contributed to its growing acceptance in the global financial landscape.
As seen throughout its history, Bitcoin has proven to be a key player in the financial market. Its decentralized nature and ability to operate outside of the traditional financial assets system has gotten it the name—digital gold. Although Bitcoin’s technology and economic dynamics differ from traditional financial assets, they are sometimes correlated especially during market downturns.
Stocks are one of the oldest financial instruments. And just like every other market, the dynamics of the stock market are determined by several factors.
Factors responsible for a stock market downturn include:
Despite being subject to these factors, Bitcoin was largely uncorrelated with stocks for a while. However, the onset of the Covid-19 pandemic marked a significant turning point. The correlation between Bitcoin and stocks, particularly benchmark indices like the S&P 500, became more pronounced.
Factors such as economic conditions, investor sentiments, and macroeconomic trends contributed to this correlation. The COVID-19 pandemic marked a period of economic uncertainty, and most investors liquidated their investments since the world was on lockdown. So as the stock market plummeted, the crypto market also dwindled. Everyone was playing a survival game and financial markets bore the brunt of the panic.
However, as the world gradually moved towards normalcy, Bitcoin decoupled from the stock market. A primary reason for this was that investors saw the frailties of the stock market and decided to shift their investments toward crypto. The aim was to shield their investments while profiting from Bitcoin’s volatility. Furthermore, several institutional investors moved into the cryptocurrency space. Bitcoin became part of the investment portfolios of these companies.
The relationship between Bitcoin and traditional financial markets, especially during times of crisis or market crashes, is complex. Several factors have a role to play especially during crashes. There are several periods where there has been a crash and certain investors view Bitcoin as a safe haven asset. This perspective on Bitcoin leads to a rise in price during periods of economic uncertainty or market downturns.
Also, Bitcoin’s decentralized quality makes investors perceive it as a protective asset during times of economic instability. This creates an increased demand for Bitcoin, thus leading to a value surge.
However, it is always wise to remember that Bitcoin is a volatile asset. Therefore, the price can be influenced by other predictable or unpredictable factors. Sometimes, extreme market conditions can greatly increase the fear index of investors and instead of demanding Bitcoin, they’d rather sell off their holdings.
What this means is that even though investors can turn to Bitcoin for financial succor, there are no guarantees. The relationship between Bitcoin and the traditional market is not stable, it can change based on various factors. It is advisable to conduct thorough research and consider several strategies based on risk tolerance and financial goals before delving into any investment.
Several factors can influence the price of Bitcoin whether for a high or a low value.
The process known as halving leads to a decrease in the rate at which Bitcoin is mined over time. This mining happens every four years and this reduction in the rate of supply growth may impact the balance between supply and demand. When demand and supply are affected, prices are also affected.
Another is market sentiment. The way the public perceives Bitcoin can either be a good or bad thing for Bitcoin. Positive news, regulatory developments, or institutional adoption can boost confidence and drive prices higher. While negative news, security concerts, or regulatory crackdowns can create fear and lead to price declines.
When there are changes in the underlying technology in Bitcoin, it also affects the prices. When there are improvements in scalability and security, it boosts investors' confidence and drives the price of Bitcoin higher.
Bitcoin is known for its price volatility. While volatility can provide opportunities for traders, it can also be a deterrent for risk-averse investors. Large price swings can lead to rapid gains but also significant losses.
Another thing most people fail to remember is that while Bitcoin is growing and spreading globally across organizations and nations, it still has a relatively small market. Bitcoin's market is still relatively small compared to traditional assets. In times of panic, there is a huge chance that liquidity can dry up. And when this happens, it leads to exaggerated price movements. Lack of liquidity can also make it challenging for large institutional investors to enter or exit positions without impacting the price significantly.
What is the price of Bitcoin during the stock market crash?
In March 2023, Bitcoin briefly fell 8% to below $20,000 after a stock market sell-off in the U.S. The cryptocurrency market saw more than $70 billion wiped off its value over 24 hours.
Will Bitcoin act as a Safe Haven during a Market Crash?
Bitcoin possesses the potential of increasing or decreasing in value during times of economic or market uncertainty serving as a refuge for investors. However, due to its volatile nature, it is uncertain if Bitcoin will remain so during a market crash.
How has Bitcoin Performed in Previous Market Crashes?
2013 saw China banning financial institutions from handling Bitcoin transactions. This action from China led to a significant drop in price. During the Covid-19 pandemic in 2020, global financial markets experienced a sharp decline. Though Bitcoin dropped in value for a while it gained a massive surge quickly compared to traditional markets.