Could another U.S. market crash push investors to Bitcoin?
September 15 marked the ten-year anniversary of the collapse of Lehman Brothers, the fourth-largest Wall Street investment bank, resulting from a crippling economic crisis. The wounds of the 2008 financial crisis are still fresh, especially in the eyes of those still recovering from the dark episode of being rendered homeless and unemployed. The past decade led to a wave of financial reform and regulations, and American households are evidently reaping the benefits.
U.S. household wealth has escalated sharply and has surpassed the $100 trillion mark, due to several profitable investment opportunities and federal legislation. However, there exists an imbalance between household wealth and income, which is currently stagnating. Despite the financial growth seen a decade after the lowest point in the U.S. housing market, some analysts believe this imbalance could cause yet another market meltdown.
In the quarter ended March this year, household wealth hit the aforementioned milestone, marking significant progress for the recovering U.S. economy. However, when this wealth is compared with the stagnating household income, the former cannot survive in the long run.
“Household net worth cannot sustainably grow this much faster than incomes. Assets have been bid up and at some stage, there has to be chance that they correct, just as happened in 2000 and 2007,” AJ Investment director Russ Mould told Business Insider.
Mould warns that, given the bullish stock markets of the U.S. and the prosperous real estate market, there is an inevitable increase in the wealth possessed by households. He added that in order to sustain this growing wealth, a consistent income should be present; if not, a severe market correction will take place.
“The difference is likely to be accounted for by the surge in the value of financial and other assets — equities, bonds, property and frankly (sic) everything from vintage cars to art to wine to baseball cards. And this is one warning that at some stage another collapse in financial markets will sweep around the globe,” cautioned Mould.
The outspoken economist and professor at the Stern School of Business, NYU, Nouriel Roubini, marked 2020 as the year of the next U.S. financial crisis, referencing the past year’s bubble-like behavior of the market.
There is obviously a contrast between the household income, household wealth and the ever-increasing global debt, currently at $250 trillion. All these factors point to a potential market correction, which could range from a minor correction to a full-blown financial crisis, as suggested by Roubini.
To protect themselves from a market crash, households will seek safer havens for their wealth, by converting their existing wealth into assets that can help in hedging against these risks. As the popularity of Bitcoin grows, virtual currencies could be a reliable store of value during the coming tumultuous times, in spite of its volatility.
Matt Hougan, vice president of research and development at Bitwise Asset Management, told Bloomberg in an interview that a drop in the overall market does not necessitate a crypto bull market.
“Non-correlation is not the same as inverse correlation so there’s no guarantee that when the market goes down crypto will go up. Over the long term, we think the fundamental drivers of crypto are different from the fundamental driver of equities and other assets, and we would expect the low correlation to persist,” he explained.
Over the years, one particular section of the population seems to be increasingly attracted to digital assets. Millennials seem to be the most drawn towards cryptos, with surveys showing that over one-third of millennials are looking to invest in virtual currencies in the next few years and over 80 percent of American millennials know about Bitcoin.
As this growing demographic will one day influence the markets, it is quite likely that when a financial crisis hits, Bitcoin and other cryptos could emerge as the safest investments to insulate against the resulting risks.
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