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.
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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.
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.
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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?
Well, I got you covered with this video on screen.