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The year 2009 was marked by both the genesis of Bitcoin and the United States stock market starting an unprecedented bull market one thats continued almost uninterrupted since. However, murmurings of a crash are always present, and the noise has recently been getting louder.

Against the backdrop of COVID-19 refusing to go away, stocks keep pushing higher, backed by an unprecedented amount of government support. But now that quantitative easing policies are no longer being implemented, is the talk of a stock market crash justified?

If so, this could bring unfortunate news for Bitcoin (BTC): It could be argued that there are signs of a strong correlation between Bitcoin and stocks. So, what may happen to crypto if the bottom falls out of U.S. equities?

Taking crypto out of the picture, the increasing speculation that a crash is imminent does hold some merit. In June, the inflation rate in the U.S. was significantly higher than expected. In the meantime, the government continued to issue bonds and accrue more debt to the point that theres now talk of raising the debt ceiling.

The justification for this is, of course, the ongoing pandemic relief effort. But the government is pumping money into the economy when other signs, such as U.S. stock prices, indicate that the relief isnt needed. U.S. real estate markets are also surging, while the Federal Reserve has already expressed concerns that investors are becoming increasingly reckless, referencing the appetite for meme stocks and cryptocurrencies as cases in point.

All this money pumping into the economy has to dry up at some point, leading to justifiable speculation that a crash could be the inevitable consequence. Michel van de Poppe, Cointelegraph columnist and full-time trader, believes that the expectations of a heavy correction are justified, adding:

Toya Zhang, marketing manager at AAX exchange, agrees that a crash is coming but urges caution on attempting to predict the timing. Given how common stock market declines are, and the fact that the market is somewhat overvalued, I think theres a reasonably high probability of a stock market downturn, Zhang said. Nobody can say exactly when that will happen, though.

One question is: How linked were the recent market recoveries in both crypto and the stock market back in March 2020? Most stock market analysts were surprised by how fast and furious the recovery was. Although, the fact that the S&P 500 skews heavily to tech companies explains a lot given how quickly the world turned to digital.

But in the crypto space, the narrative was somewhat different. In the absence of any other explanation for the crypto market crash, most people were surprised that Bitcoin had behaved in a way that appeared to mirror stocks. After all, the assumption had always been that BTC was uncorrelated and would act as a hedge against more traditional asset types such as stocks and precious metals.

Based on the most recent experience, history would suggest that if the stock markets were to crash in 2021, the crypto markets would follow. An alternative scenario would be that the stock market crashes and investors immediately move funds into crypto. Even without the benefit of March 2020 hindsight, this seems unlikely. Crypto still has a reputation as a notoriously volatile asset, one thats untested as a safe haven in a financial crisis.

However, what happens post-crash could make for a more interesting discussion about market correlations. What if, this time around, the stock markets dont go into automatic recovery mode? This scenario is a reasonable assumption, given that the pandemic effect is now priced into the markets, and theres a lot less uncertainty than there was in March of last year.

What would BTC do in the event of a prolonged flat or even bearish period in U.S. stocks? The most powerful premise for the Bitcoin is uncorrelated to stocks argument is that Bitcoin has its own market cycles linked to halving that dictate its price movements in a far more compelling way than any external economic forces. Examining it through this lens, one could speculate that regardless of whether the stock markets had recovered post-March 2020, BTC would have gone on to achieve new all-time highs anyway.

But even against the ever-reliable stock-to-flow BTC price model developed by PlanB, prices have been struggling to stay within the boundary of late. Nevertheless, the recent rally means that the model has held, and prices are currently showing significant promise of a sustainable recovery. So even if tumult in the stock markets were to cause chaos in crypto, there is data that predicts that the BTC market cycles could ultimately resume their apparently iron-clad control of prices.

If there is a short-term crash, there is no evidence thus far to suggest that the Bitcoin price will fail to follow. Assuming this occurs in 2021, what will happen afterward could become a struggle between Bitcoins market cycles and the effects of a prolonged economic downturn.

However, assuming the effect of the former can outweigh the latter by even an increment, it would make Bitcoin attractive as a safe haven asset (in the absence of many other alternatives). If everything else is going down, BTC only needs to maintain its value to tempt investors. But suppose Bitcoins halving cycle proves able to negate the effect of a prolonged market downturn altogether. In that case, BTC could become one of the only assets to offer the opportunity for significant returns during a downturn.

Sean Rach, co-founder of not-for-profit blockchain services firm hi, believes that crypto will ultimately become an attractive asset for alpha seekers. The growing dissatisfaction with the financial system, as well as the history of all fiat currencies, means the search for alternatives remains a positive factor for the growth of the crypto markets, said Rach. Meanwhile, Mati Greenspan, founder and CEO at advisory firm Quantum Economics, told Cointelegraph:

Ultimately, its worth remembering that crashes are short-term events. They may be painful, but the longer-term outlook is where things get more interesting. Suppose stocks end up in a sustained bear market while the macroeconomy recovers. In that case, it could easily turn into an opportunity for investors to scoop up a bargain once crypto bottoms out. As such, while a short-term correlation could be hard to avoid, theres every chance that crypto could buck the markets in the long term.

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Cause and effect: Will the Bitcoin price drop if the stock market crashes? - Cointelegraph

Didi Taihuttu, along with his wife and three kids, liquidated all of their assets and bought bitcoin in 2017, back when it was trading at around $900. Now, the Dutch family of five is safeguarding most of their crypto fortune in secret vaults on four different continents.

"I have hidden the hardware wallets across several countries so that I never have to fly very far if I need to access my cold wallet, in order to jump out of the market," explained Taihuttu, patriarch of the so-called Bitcoin Family.

Taihuttu has two hiding spots in Europe, another two in Asia, one in South America, and a sixth in Australia.

We aren't talking buried treasure none of the sites are below ground or on a remote island but the family told CNBC the crypto stashes are hidden in different ways and in a variety of locations, ranging from rental apartments and friends' homes to self-storage sites.

"I prefer to live in a decentralized world where I have the responsibility to protect my capital," said Taihuttu.

There are a lot of ways to store crypto coins. Online exchanges like Coinbase and PayPal will custody tokens for users, while the more tech savvy may opt to cut out the middleman and hold their crypto cash on personally owned hardware wallets.

Thumb drive-size devices like a Trezor or Ledger offer a way to secure crypto tokens. Square is also building a hardware wallet and service "to make bitcoin custody more mainstream."

People who choose to hold their own cryptocurrency can store it "hot," "cold," or some combination of the two. A hot wallet is connected to the internet and allows owners relatively easy access to their coins so that they can access and spend their crypto. The trade-off for convenience is potential exposure to bad actors.

"Cold storage often refers to crypto that has been moved to wallets whose private keys the passwords that enable the crypto to be moved out of the wallet are not stored on internet-connected computers, so that hackers can't hack into the computer and steal the private keys," said Philip Gradwell, chief economist of Chainalysis, a blockchain data firm.

Gradwell said exchanges will also often use cold wallets to secure the crypto their customers have deposited.

A recent Chainalysis report examining wallets holding bitcoin shows that 11.8 million bitcoin is in the hands of long-term investors, 3.7 million is lost, another 3.2 million is circulating among traders, and the remaining 2.4 million have yet to be mined.

"We can guess which wallets are cold storage as they have particular behaviors, like receiving large amounts of crypto from a single source and not sending any for a long time until they are emptied all in one go but you cannot definitively tell that a wallet is being used as cold storage," said Gradwell.

In the case of the Taihuttu family, 26% of Didi's crypto holdings are "hot." He refers to this crypto stash as his "risk capital." He uses these crypto coins for day trading and potentially precarious bets, like when he sold his dogecoin for a profit and then bought it back when the price of DOGE bottomed out.

The other 74% of Taihuttu's total crypto portfolio is in cold storage. These cold hardware wallets, which are spread around the globe, include bitcoin, ethereum and some litecoin.The family declined to say how much it holds in crypto.

Bitcoin, ethereum and litecoin are all in the midst of yet another climb higher, up 57%, 83% and 61%, respectively, in the last three weeks.

Moving bitcoin to cold storage isn't a new idea. For as long as there's been bitcoin, there's been a way to store it cold. But it requires more upkeep.

"Cold storage requires a lot more permissioning in order to access it, whether it be in a bank vault or whether it be buried in the Andes mountains," said Van Phu, a software engineer with crypto fintech start-up Floating Point Group.

And while Taihuttu said it's easy to top up the addresses of these cold storage wallets with fresh crypto coins, retrieving them is a different story. Drawing down on his cold crypto requires physically flying to his many hiding spots.

Taihuttu is trying to put a crypto cold wallet on every continent so it's easier to access his holdings.

Buried in the Swiss Alps is a vault inside adecommissioned military bunker that's cut off from the internet, guarded by an onsite security team, and apparently, according to digital bank Xapo's website, "watched over in the skies by satellite." The precious merchandise under lock and guard is bitcoin.

Coinbase bought Xapo in 2019, an unsurprising move for a company that stores 98% of customer funds offline, in order to provide "an important security measure against theft or loss."

While centralized vaults like these offer certain security protections, Taihuttu said it feels too centralized to him.

"If you want to store your coins truly outside of the reach of the state, you can just hold those private keys directly. That's the equivalent of burying a bar of gold in your backyard," said Castle Island Ventures general partner and Coin Metrics co-founder Nic Carter.

That's why Taihuttu doesn't use banks or post offices. "I find it just too risky," he said. "What happens when one of these companies goes bankrupt? Where are my bitcoins? Will I have access? You again put the trust of your capital in the hands of a centralized organization."

But Taihuttu said some centralized cold storage companies offer a major perk.

"They have beautiful setups for inheritance," he said. "When you die, these companies handle that, as well, and I really believe they are doing a great job."

Phu said multiparty computation, or MPC, is also proving instrumental in the digital asset space. In this custodial arrangement, multiple parties all have to give consent in order for a transaction to go through.

This avoids the risk of storing private keys and authentication credentials in one single place, something known as a "single point of compromise." MPC instead breaks up the private key into shares, encrypts it, and then divides that among multiple parties, according to Fireblocks, a digital asset infrastructure provider.

"I think the evolution right now is to MPC," said Phu.

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The family that bet everything on bitcoin when it was $900 is now storing it in secret vaults on four different continents - CNBC

The day that bitcoin becomes less volatile is the day that mass adoption will begin. Or is it that mass adoption will minimize volatility on bitcoin?

This is one of the most popular debates in our space as market participants try to speculate when the volatile price action of bitcoin will get smoother. Those who know me are familiar with my stance on the subject: Mass adoption should eventually smooth the volatility curve and price swings on bitcoin, but this adoption could increase volatility significantly in the near term, as the expanding ecosystem continues to adjust to the inflow of new market participants.

As the Bitcoin ecosystem grows and evolves, new players continue to enter with different characteristics from one another, something that can bring disruption or even stress in an ecosystem that has been used to a different reality for such a long time.

Some of the lowest levels of volatility, in fact, occurred during the early adoption stage (2013 to 2017) of bitcoin, when the market cap was below $20 billion and the network was dominated by early believers in a buyers-only market. Then suddenly, volatility struck with a massive sell off that shook the world in 2018 and took many people out of the market.

But what happened prior to the sell off that triggered that event? Many things have been said about this, but few approaches have acknowledged a key event that took place a little earlier, in December 2017: the introduction of the first bitcoin futures product, which started trading on the Chicago Mercantile Exchange.

This was an event that for the first time created a new reality. The ability to short-sell bitcoin on a large scale. In other words, the ability to sell bitcoin that you had never previously owned (even if that bitcoin was never real, but rather just a price tracker).

That consisted of the first expansion of the Bitcoin ecosystem, which came to counter the prior reality of a buyers-only market.

The growing popularity of bitcoin as an asset class on its way to mass adoption triggered the creation of the futures market and the creation of a new type of market participant, the short seller, something that led to a sell off we all remember.

Source: TradingView

Moving forward, as bitcoin entered a new market cycle, the pain of 2018s sell off took most momentum players out of the system and allowed the maximalists to regain the majority composition of the network.

Something that led to the gradual rejuvenation of prices all the way through mid-2020, when bitcoin became, for the first time, the coolest kid in town and mass adoption started to seem like a potential reality.

But, before we address the present, lets take a look at how volatile bitcoin was as it headed toward the CME listing, the price ease and the return to relativity for people outside the network.

Source: Bloomberg Terminal

Bitcoin was quite volatile, some might say, as the network was preparing itself for mass adoption. But how does this compare to the price action of mid-2020 to the present, when a record inflow of market participants joined our network and mass adoption began to start getting triggered?

Source: Bloomberg Terminal

The record inflow of new market participants led to record volatility in the network, a volatility that does not seem ready to leave the system yet. Why? you might ask. Did we not always believe that mass adoption will bring balance in the system? How come bitcoin, at a $100 billion, $300 billion or even $1 trillion market cap, is more volatile than bitcoin at a $20 billion market cap?

The answer is simple: The market participants now have different utilities and purposes than they did in the early adoption stage, and the network is having a small shock as it is trying to absorb the growth, similar to acne on a teenagers face as their body grows into that of an adult.

Bitcoin with a market cap in the hundreds of billions of dollars has many new players. Players with different roles and beliefs, with the maximalists accounting now for a significantly smaller part of the pie. The ecosystem has evolved from a buyers-only market that welcomed initially long-term investors, to welcome momentum traders and speculators, proprietary desks and liquidity providers, lenders and a series of other new roles that are in fact very much needed for the long-term purpose of mass adoption, but who have brought extreme volatility in the near term as the network tries to adjust to the new, constantly-evolving reality.

All of that, as one question continues to dominate the market: How can we minimize volatility on a network that has grown from an infant into a baby, but still has a long way to go until its fully developed?

The answer is simple: risk management.

Risk management from an individual perspective is the most significant assistance that each of us can offer to bitcoin in order for it to continue to grow and accept new members under lower volatility and smoother price swings.

When it comes to risk management, the number-one rule is understanding your risks. But before we understand them, we actually need to acknowledge them.

Denial of risk refers to cognitive ways to develop adaption to risky behaviors by rejecting the possibility of suffering any loss. -Peretti-Watel

It aint what you dont know that gets you into trouble. Its what you know for sure that just aint so. -Mark Twain

What if the accumulated total of the bitcoin positions in the world were not based on random outcomes, but instead on scenarios known ahead of the position establishment?

What if the liquidation of that leveraged position could have been prevented?

What if the profit of a miner was locked one year out ,or 70% of the value of your portfolio was secured?

Then confidence would dominate the market and the next sell off would not have been as bad as the prior one.

Risk management is a vote of confidence in bitcoin.

Why? Because confidence is derived by known outcomes and known outcomes are an output of risk management.

Risk management is the answer to extreme volatile swings and lesser sell offs. The moment the downside is not detrimental to our portfolios or lives savings, is the moment that liquidations will be avoided and panicked selling will seize.

The moment everyone individually manages their risk is the moment that price normalization will be attained and confidence will be achieved in the broader market.

But how do we even approach risk management?

For starters, risk management begins with position placement and trade execution. Or by simply avoiding an overleveraged situation that you have absolutely no control over.

Risk management occurs by making sure that we do not engage in a trade that, if gone wrong, will threaten the financial wellbeing of ourselves and our families.

Risk management occurs when you put a stop loss on your leveraged position instead of doubling down or hoping that prices will return back to where they were.

Risk management occurs when you quickly realize that you are the one who is wrong, not the market, and accordingly adjust your exposure.

In a more moderate approach, risk management can be achieved through the derivatives markets, when you buy a put option in order to establish a maximum loss scenario or a minimum gain. Or simply when you sell some futures contracts for part of your physical position in order to protect your portfolio against nearby volatility and potential adverse market conditions.

Just like anything else in life, risk management should work as a damage-aversion mechanism, not as an aftermath solution. Our goal should always be to avoid our house catching on fire, not putting the fire out once its too late.

This is a guest post by Anestis Arampatzis. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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Bitcoin Price Volatility And How Risk Management Is A Vote Of Confidence - Bitcoin Magazine