If I had to pick one word to describe the sentiment toward bitcoin, it would be cynicism. Sure, the underlying blockchain technology has never been relevant. For one thing, with millions of permanent job losses due to the novel coronavirus pandemic, the rise in the unbanked or underbanked should be significant. Cynically, then, this should augur very well for cryptocurrencies like bitcoin or more “capable” altcoins like ethereum.
On a broader level, the still-uncomfortably high number of people seeking initial jobless claims, as well as those still collecting unemployment benefits, means that demand for safe-haven assets is significantly high. Of course, many have turned to the precious metals market to protect their wealth away from the fluctuations of fiat currencies. However, physical metals are cumbersome. Even online ordering is risky, given the rise in property crime due to increased desperation.
Thus, with the pandemic, bitcoin represents a contactless hedge against the smelly stuff hitting the fan. It’s a fortuitous tailwind, to be sure. But good fortune is a recurring theme in this cynical arena. If I’m reading the signs correctly, cryptocurrencies are just getting warmed up.
I say that primarily because those who have been fortunate enough to work from home are seeking ways to put their money to work. As The Wall Street Journal reported, stock trading platforms like Robinhood experienced a boon during the initial phase of the Covid-19 crisis. With millions quarantined at home, they fueled their funds and energy toward equity markets.
At first, many were successful because of, again, good fortune. The time when white-collar workers were sent home coincided largely with the bottom of the market. Almost surely, many newcomers felt that they uncovered a hidden talent for stock picking.
Of course, Wall Street had its say recently. Now, as red ink scatters all over the map, I’m certain these overconfident rookies are rethinking their strategies. But they won’t think long because bitcoin and cryptocurrencies — a favorite among younger investors — have bolstered their portfolios.
Should we see more of virtual currencies outperforming equities, we’ll eventually have a rollover effect. In that case, bitcoin could print fresh all-time highs.
We’ve Seen This Before from Bitcoin
When I say fresh highs, I want to make one thing clear: I don’t know if we’ll hit a price target that would have saved John McAfee from himself, if you know what I mean. If you don’t, look up McAfee and “Richard.” That’s really all I can say on this family-friendly website.
However, I believe there’s a solid chance that we’ll see a bitcoin price tag within 90% of its record high, which was just under $20,000. Not only is the fundamental picture strong, as I mentioned above, the technicals look good as well. Beyond that, the long-term historical price chart suggests this crypto leader is itself a leading indicator to the S&P 500 index.
On paper, that might sound like an absurd argument. Admittedly, the mathematical evidence makes it seem more ridiculous. From mid-September 2014 to October-end of this year, bitcoin and the S&P 500 share an 88% correlation coefficient. Basically, these two assets track each other very well.
Of course, that doesn’t mean the correlation is a perfect 1:1. Interestingly, where the correlation breaks off is where bitcoin gets ahead of itself relative to the stock market gauge. Let’s look at a few examples:
- Bitcoin’s bull market that started in earnest in 2016 predated the strong rise in the S&P 500 in late 2016/early 2017.
- The blockchain token hit a wildly bullish peak in December 2017, predating the stock market peak right before the coronavirus hit.
- Bitcoin has been rising since September, whereas the S&P 500 has been volatile since late August.
On that last bullet point, if trends follow what we’ve seen before with this pairing, we should anticipate that the S&P 500 will suffer more volatility. However, bitcoin could be off to the races. So, when cryptos peter out and equities catch up is anyone’s guess. But the fundamentals suggest that we could see some wild gains.
It bears repeating: young investors love both stocks and virtual currencies. But when one is badly underperforming while the other is generating green, a rollover effect appears inevitable. If this forecast is correct, we’ll see further negativity in equities while cryptos go on their proverbial moonshot.
There’s a Darkly Cynical Side to Cryptos as Well
It’s not something that legitimate cryptocurrency proponents discuss frequently because it makes the sector look less than legitimate. However, the underlying cryptography and its inherent anonymity makes the blockchain markets an ideal platform for nefarious activity.
Moreover, due to sharply rising new daily coronavirus cases, the risk for cyberattacks increases exponentially. And that’s not my words but those of the FBI and other federal agencies, which warned that there could be “an increased and imminent cybercrime threat” to U.S. healthcare facilities. Specifically, these facilities could fall under ransomware attacks.
While I don’t know much about ransomware, I can tell you that the perpetrators will not be asking for a check. Therefore, the increase in nefarious activities could spike crypto prices, urging more investors to jump in due to FOMO (fear of missing out).
Obviously, this isn’t a central part of my bullish thesis. But it’s very intriguing that even the “dirty” arguments are supportive of cryptocurrencies. No doubt, this is an incredibly risky market. Still, if you have some “dumb” money burning a hole in your pocket, you might want to look into virtual currencies.
On the date of publication, Josh Enomoto held a long position in bitcoin and ethereum.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.