The ‚Warren Buffett‘ indicator predicts a stock market crash: how will Bitcoin react?
The Buffett Indicator places the current U.S. stock market at levels similar to the dot-com bubble, according to Yahoo Finance on August 20. The indicator divides the Wilshire 5000 index by US GDP.
Meanwhile, on August 14, Berkshire Hathaway, led by Warren Buffett, invested in Barrick Gold, the second largest precious metal extractor in the world. Some analysts believe that the move could benefit Bitcoin (BTC) in the long term, as it coincides with the alarm raised regarding the possible stock market bubble.
The historical average of the indicator is 1, and before the burst the dot-com bubble was around 1.71. Currently, the Buffett Indicator is at 1.7, indicating that the stock market is highly overvalued.
If the U.S. stock exchange collapses as a result of investors‘ fears regarding the overvaluation of stocks, Bitcoin could respond with a significant reaction.
Suggestions about Bitcoin’s long-term trend?
According to Tom Essaye, founder of Sevens Report Research, equities are considered „fundamentally overvalued“ when the Buffett Indicator hits 1.3.
The current level of 1.7 indicates the possibility of a steep downward trend in the stock market following a reversal:
„What does this mean for us? It means stay long on stocks in longer accounts, and make sure you own assets (like a house, etc.). But it also means that this cycle of asset inflation must not stop, because as the ratio of 1.7 between the total market cap and GDP tells us, if the cycle stops it is a long descent to the fundamental support“.
Over the last four months, Bitcoin has shown a certain correlation with the S&P 500 and gold. Since the end of July, due to the decline marked by the US dollar, BTC has followed the price of the precious metal more closely.
A potential pullback in the U.S. stock exchange could strengthen Bitcoin’s momentum. Some institutions have started to consider Bitcoin as a valuable value reserve, causing a peak of institutional inflows to BTC.
The correlation between Bitcoin and gold
During the past week, the correlation between Bitcoin and the S&P 500 weakened slightly when equities continued their growth. The BTC price was rejected from $12,400, recording a loss of 8.6% to $11,370.
The reduced correlation between Bitcoin and the US stock market and the simultaneous contraction of BTC and gold support the bullish outlook in the event of a stock market crash.