How could a share market correction impact cryptocurrencies like Bitcoin?

How will Bitcoin fare in the next market correction or crash?

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With the S&P/ASX 200 Index (ASX: XJO) having lost close to 5% since its last peak back in mid-August, many investors are inevitably talking about the possibility of an upcoming market correction, or even crash.

Every investor knows that we can’t enjoy the good times without the occasional bout of market fear. And given the stellar year and a bit that ASX investors have now enjoyed, it’s not too inconceivable to expect some choppy waters going forward.

Now, we all know how the share market fares when there’s fear in the hearts of investors. Cast your minds back to March 2020, and we saw the ASX 200 lose a devastating ~36% in just over a month. Of course, we got that all back and then some in the months following this COVID-induced crash.

But how do cryptocurrencies like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) fare in times of market stress?

Well, since cryptocurrencies have only really been around for roughly a decade (even less in the mainstream investing consciousness), we used to only be able to guess at how the crypto markets might respond to an event like a share market correction.

Some Bitcoin bulls pointed to its similarities with gold, a traditional safe-haven asset that often gets a boost during fear-dominant events. Others point to its speculative nature as evidence that Bitcoin and other cryptos would get wiped out in a crash. Speculative investments are usually the first things nervous investors bail out of.

Well, now that the 2020 market crash is firmly in the rearview mirror, we can actually paint a fairly broad picture of how cryptos might perform in a market correction or crash.

How did cryptocurrencies like Bitcoin fare in the 2020 share market crash?

So let’s do the math.

The ASX 200 lost around 36% of its value between 20 February and 23 March last year. Let’s see how Bitocin performed.

So Bitcoin was trading at roughly US$10,350 per coin back in mid-February 2020 (hard to believe, I know), according to tradingview.com. But the cryptocurrency was not immune to the share market selloff that late February and early March brought us.

By 12 March 2020, the crypto found its bottom after 2 weeks of heavy selling. It ended up bottoming out at a price of roughly US$4,875 a coin. That represents a fall of approximately 52.9% peak-to-trough. We saw a similar move with Ethereum.

Of course, Bitcoin, just like the ASX 200, rapidly recovered. It was back to its February high by July, and then went on the run we all know it for today, hitting an all-time high of just over US$63,000 a coin back in April this year.

But this analysis shows that cryptocurrencies like Bitcoin are definitely not immune to a share market correction or crash. In fact, Bitcoin fared far worse than the ASX 200 last year. Something to keep in mind for every cryptocurrency investor today. 

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Motley Fool contributor Sebastian Bowen owns shares of Bitcoin and Ethereum. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin and Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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