Conventional wisdom says that even if the Bitcoin bubble pops, as it’s been threatening to lately, the damage won’t spill over into the broad stock market. That’s because in dollar terms, the cryptocurrency bitcoin market share remains tiny compared to, say, the dotcom boom, which led the broader market to a painful crash in 2000.
Still, there are three plausible ways the bursting of the Bitcoin bubble could gore the aging bull market in stocks, which is about to turn 9 years old in March. 1: The Bitcoin bubble bursts investor confidence. Jim Paulsen, chief investment strategist at The Leuthold Group, an asset management firm based in Minneapolis. Paulsen points out that Bitcoin prices didn’t really start to rise dramatically until the end of the third quarter of 2017, when it became clear that the economy was accelerating. In that sense, Bitcoin has a tangible connection to stocks. The same investor confidence that’s been fueling risk-taking and speculation in the global equity markets has also been behind the cryptocurrency rise that accelerated in the fourth quarter of last year.
So while a collapse in cryptocurrency prices won’t necessarily have an economic impact on equities the way the Internet bubble did, it could have a domino effect on investor psychology. 2: Companies jump on the Bitcoin bandwagon just before a crash. In the late 1990s, investors started noticing something: All a company would have to do was to put a dotcom at the end of its name or include a sentence in a press release about launching an e-commerce site, and the stock would jump. Well, something similar is happening with cryptocurrencies today, and that’s pulling more and more companies into this frenzy—making its impact on the economy much larger than the market value of cryptocurrencies would suggest. 9, Kodak shares have more than tripled in value. Kodak then doubled down on crypto. 10 chicken tenders, fries, a medium side dish, gravy, and dips—that can only be purchased using the virtual currency.
Some companies aren’t just dabbling in cryptos. They are changing their entire business models. Late last year, the biotech equipment maker Bioptix changed its name to Riot Blockchain and its business plan to investing in cryptocurrencies and blockchain technology. The same thing happened with Long Island Iced Tea, a little-known beverage maker that changed its name to Long Blockchain and its business model to investing in blockchain technology. But as many market watchers point out, Pets. 1990s—until the bubble burst and the fog lifted.
3: A cryptocurrency crash has a Wile E. Once they realize there’s nothing support them, they start to drop. In other words, investors are often willing to keep going in one direction, even if it seems risky or irrational, until they’re jarred. But when they are scared or shaken enough—for instance, by a financial collapse, like in the global financial panic in 2007—they start looking down at their feet and notice how dangerous their strategy really is. Is a crash in Bitcoin a big enough to get investors’ attention? You can’t hardly go anywhere in the financial world or financial press without seeing a mention of Bitcoin.