Igor Bubelov About Blog Photos

Economics

December 22, 2020

It’s a common belief that markets can detach from underlying economies, so the price of financial assets may not reflect their fundamental valuations. We saw a huge drop in stock valuations during this year, but it quickly reversed and 2020 turned out to be one of the best years for stocks.

How can a rational market be so volatile and uncertain? Let’s take Bitcoin as an example. It dropped to $3,000 in Spring but it rose to $28,000 in December. What changed? Those are hard questions, and no one knows the answers.

There are voices that attribute the rise of Bitcoin price to hedging against inflation and stock price declines, but I don’t see any evidence for that. On the contrary, Bitcoin price collapsed exactly when the stock price did, so it didn’t protect investors from the decline in stock valuations. Can it protect people from inflation? In theory, it might. In practice, we have no idea.

In my opinion, both stocks and bonds are severely overvalued, and it might prop up the price of gold, Bitcoin and any other assets which are out of grasp of central banks during 2021.