Why Bitcoin and Gold prices go up when traditional markets are shaky?

Traditional stock markets historically undergo a cycle of climbing and crashing with minor corrections in between, the last major crash being between 2007 and 2009. More and more people are looking outside of the traditional stock markets to keep their money, turning to crypto as a more reliable investment for the future, but also as a safer alternative to traditional currency.

Never the less, how does the stock market behavior, in particular stock market crashes, affect bitcoin and other forms of currency?

Inverse Relationship of Stock Markets vs Gold - When stock markets crash, people flee their investments into diversified asset classes such as gold in order to decrease their losses (gold prices rising during the Great Recession). This seems to be applying to crypto as well. This means that these two alternative asset classes and stock markets are negatively correlated.

Demographics - alternative asset classes enjoy varying degrees of popularity among different generations. Millennials are the largest segment in the workforce, and we know that when it comes to alternative currencies, Bitcoin is the popular choice amongst millennials compared to gold. If a major segment in the work force invests in a certain asset class, its price inevitably goes up. This is especially true during times of crisis.

bitcoin and gold

Cryptocurrency hasn’t been around long enough to predict how investors would behave in case of a disastrous stock market crash, but we can take gold as an example.

Although the price of gold rose dramatically during the Great Recession, it is important to note that it was already steadily rising prior to the crisis and continued to rise during recovery until it peaked in 2011.

Gold has positive price elasticity, which means that the more people buy gold, the more its price rises – in line with demand. This is true for Bitcoin, as when it was first launched and hadn’t yet gained popularity, its price was absurdly minimal ($0.08 for 1 BTC in July 2010), whereas now it’s the most popular cryptocurrency on the market, and its current price definitely reflects that ($10,321 for 1 BTC as of Sept 12th).

Based on evidence so far and as more time passes, we believe that this negative correlation between cryptocurrencies and traditional markets will continue. As of right now, all we know is that though cryptocurrencies are new and seem volatile - but, then again, so are the stock markets.

 

Sources:

https://en.bitcoinwiki.org/wiki/Bitcoin_history

https://www.investopedia.com/articles/active-trading/031915/what-moves-gold-prices.asp

https://goldsilver.com/blog/if-stock-market-crashes-what-happens-to-gold-and-silver/

https://www.cryptotapas.com/what-happens-to-bitcoin-if-stock-market-crashes/

https://www.forbes.com/sites/investor/2018/05/08/bitcoin-price-is-correlated-to-stocks/#60d8fc264072