The World Economic Forum site is full of lessons about the dark totalitarian designs of the powerful, but the IMF Blog isn’t bad either. The former vice-president of the NY FED has just written there that the stock market and Bitcoin could fall in tandem.
Tobias Adrian is not on his first try. The director of the IMF’s financial markets department had already targeted bitcoin in his paper ” Cryptoassets as National Currency? A Step Too Far “. In particular, he argued that ” the prices of imported goods and services would fluctuate massively and permanently if all prices were denominated in bitcoin “.
Of course, except that bitcoin is not the only currency in use in El Salvador. It is alongside the US dollar.
This cliché nevertheless offers us the opportunity to recall that bitcoin is not intended to replace national currencies. It is not necessary for supermarkets to display their prices in BTC for the latter to fulfill its anti-inflationary mission. Turkey recently banned BTC purchases without losing popularity. On the contrary.
It is obvious that bitcoin cannot be used as a unit of account. It is too volatile. It would be an accounting nightmare. That being said, volatility is not at all the loophole some thought they had found. Bitcoin is above all a store of value, moreover a store of value that can be converted into euros or dollars in a fraction of a second, if necessary…
Now let’s come to the last production of this former central banker who goes so far as to suggest that the next stock market crash will take bitcoin down with it, and vice versa. He argues that ” the US stock market was not correlated to bitcoin between 2017 and 2019 “, but that ” this almost zero correlation rose to 0.36 in 2020, signaling that the two assets have moved in a more synchronized way, both down and up “.
As a reminder, a correlation coefficient varies between 1 and -1.
- A coefficient of 1 means a perfect correlation (the two assets move in exactly the same direction)
- A coefficient of -1 means a perfect inverse correlation (the two assets move in exactly opposite ways)
- A coefficient of 0 means there is no correlation
Here is the graph of this correlation that the IMF published in its research paper “ Cryptic Connections » :
The first thing to say is that a correlation coefficient of 0.36 denotes a rather weak correlation. The paper prefers to insist on the fact that this correlation becomes positive, without daring to say that it would be significant.
Note then that this figure of 0.36 is an annual average. The bulk of the rise came at the start of the pandemic that we’ve been touted as the black plague, causing widespread panic that plagued both stock exchanges and bitcoin. Hence the momentary increase in the correlation at the start of 2021.
The question now is whether this relatively strong correlation will repeat itself in the next stock market crash. Tobias Adrian thinks so:
“Bitcoin’s correlation with stocks has become higher than that between stocks and other assets such as gold or AAA debt. […] The increasing correlation between BTC and stocks raises the possibility of a spread of investor sentiment between these asset classes. Thus, a sharp drop in the price of bitcoin could increase investors’ risk aversion and cause the stock markets to fall. »
Contrary to this gray eminence who eats out of the hand of the FED and the IMF, yours truly is convinced that this correlation was only the result of extraordinary circumstances (the fear linked to Covid) and that bitcoin will pull out of the game the next time.
A crash which, by the way, could well be for this year, according to the Banque de France. Indeed, debt buybacks by the FED will stop in March. Without this monetary morphine, valuation levels will fall to better reflect the reality of dividends. Not to mention the non-existent growth prospects given peak oil…
So what about this supposed correlation?
First, note that while this correlation has indeed remained positive lately, it continues to decline. We are now closer to 0.15 than 0.36. Which is ridiculously low and shows a lack of correlation more than anything else.
In addition, central banks jumped at the chance (pandemic) to turn the printing press like never before, which of course drove up all prices (stock market, real estate, and of course bitcoin). The slight positive correlation that we have observed over the past year is therefore more than logical.
Second, let’s not forget that inflation is at its highest in 40 years in the United States, at 7%. Officially… True inflation is in double digits. Gasoline, for example, is up 50%. It is even likely that the FED’s monetary tightening will not be sufficient to tackle inflation largely linked to two factors over which it has no control: peak oil and shortages linked to the destabilization of the supply chain. supply.
The context being set, we can ask ourselves where the money will go out of the stock market casino.
In debt? Certainly not. Just take a look at the real rates to be convinced:
Moreover, and even if the chairman of the FED warned that we ” will remain in an era of low interest rates “, the rise in future rates will inevitably weigh on the value of the debts already issued. This is therefore not where the money from the stock market casino will flow.
Will he go into real estate? It would be risky after a 25% increase in the past year alone… Especially since inflation is so high that many retirees will have to sell their property to move into more modest accommodation and use the difference to maintain their standard of living.
The only pressure relief valve is bitcoin. The quintessential digital asset will inflate as stock market bubbles deflate and inflation gallops. This is the great fear of the IMF: that all the money accumulated in the stock market bubble pours into bitcoin.
We’re talking about $100 trillion globally. It would only take 10% of all that money to take refuge in bitcoin for a single BTC to be worth more than $500,000.. Hence this grotesque attempt to make us believe that bitcoin would be correlated to the stock market…
Nicolas Teterel
Journalist / Bitcoin, geopolitics, economy, energy, climate
