What we are going to see here may be very important in the months to come. There is a lot of uncertainty in the stock market, rising inflation, and interest rates starting to rise. And there is also a lot of nervousness in the cryptocurrency market.
That is why it is essential that they have identified these myths that we are going to see here so that they can make the best decisions. Let’s see what they are.
One of the biggest fallacies related to Bitcoin revolves around the supposed diversification that it supposes against traditional financial assets, especially stocks.
Many believe that because they are bought in Bitcoin (or in cryptocurrencies in general) it does not matter what happens with the US stock market, as they are completely different assets.
However, this is empirically false.
To illustrate, let’s look at the correlation between Bitcoin and the S&P 500 (the most important index of the US stock market, which tracks the performance of the 500 largest companies listed there).
For those who do not know, the correlation is a statistical indicator that oscillates between -1 and 1.
If the correlation between two assets is -1, this means that they move in a perfectly opposite way. And if the correlation is 1, the two assets move in tandem, in the same direction, so there is no diversification.
In general terms, we could say that for there to begin to be a bit of a diversifying effect, the correlation between two assets has to be below 0.6.
The weekly correlation between Bitcoin and the S&P 500 for the years 2014-2021 is 0.9. That is, 90% of the weeks that the US stock rose, Bitcoin did, too, and vice versa.
And if you don’t believe me, just look at how stocks and cryptocurrencies moved in recent events: March 2020 (coronavirus), the Evergrande disaster, the appearance of the Omicron strain, or the recent rise in interest rates.
The reality is that Bitcoin is just another financial asset and has a high correlation with the stock market.
Therefore, if the stock market falls, there is a very high probability of seeing falls in Bitcoin. Ignoring this can have serious consequences.
2.- It is a haven of value against inflation
Another deep-rooted lie is that Bitcoin is a safe haven against rising inflation in the US and the world, as the supply of coins in circulation is limited.
The fact that this is not true follows from the previous point: Bitcoin is a financial asset and it is going to move in tandem with the rest of the assets.
And it is very likely that with high inflation and rising interest rates we will see sharp falls in stocks and bonds.
It does not matter that the supply of Bitcoin is limited if there is no demand. And this is what will happen if there is a bear market.
In fact, reality shows that Bitcoin is more related to the world of “growth” than that of “value”, a sector much more punished in times of high inflation. The weekly correlation of Bitcoin is higher with the Nasdaq (0.9) than with the Dow Jones (0.85), for the period 2014-2021.
And if this is not true for Bitcoin seen in isolation, it is much less true if we look at the crypto ecosystem as a whole.
The amount of cryptocurrencies in circulation is increasing (many of them, unlike Bitcoin, have unlimited issuance), and the value of the rest of the system is increasing compared to Bitcoin (the dominance of Bitcoin is today 40% vs. almost 70% a year ago).
For this reason, we could also argue that there is huge inflation in the crypto market if we analyze it in an integrated way.
3.- The best strategy is to buy and hold
This is one of the most ingrained myths in the minds of all investors, it is not something particular to Bitcoin.
In the crypto world, this fallacy is contained in the so-called “HODL” (it is an acronym that in Spanish refers to keeping assets for life), which is nothing more than a sample of that false belief that exists that To win in investments, all you have to do is buy and hold in the long term because in the long run everything always goes up.
The secret is this: much more important than defining what to buy is when purchase. And we could even argue that it is even more important to know when do not purchase.
Buying on a market roof can destroy capital in unimaginable ways, and it can take decades to recover. And here it does not matter if we are talking about stocks, Bitcoin, bonds or metals: it applies to all the same.
Remember that even the great geniuses of the Value Investing, like Warren Buffett or Peter Lynch, they have stated this countless times.
This has nothing to do with the long-term vision that one has on the asset. So you believe that Bitcoin is the future and that in the long term it will be worth USD 1,000,000, it does not make any sense to stay bought supporting a fall of, for example, 80%. It is always better to have an exit strategy to protect capital and in any case to re-enter later, when the uptrend resumes.
Avoiding these myths can save you a lot of headaches.
To finish, I want to invite you to download a free report that contains the 7 best stocks on the US Stock Exchange to win with a rise in Bitcoin and cryptocurrencies in 2022. You can download it at this link: Financial Charter – 7 best actions.
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The 3 biggest lies about Bitcoin