It is currently raining all-time highs on the financial markets. The Bitcoin price reached a record in euros earlier this week, the gold price is at all-time highs and shares also performed fantastically until yesterday. But one indicator is predicting some storms for the stock market.
Could that be positive for Bitcoin?
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What’s going on?
The so-called CAPE ratio, also known as the Shiller P/E ratio, is used to assess the valuation of the S&P 500 over a longer period of time.
This ratio looks at the index’s price relative to average inflation-adjusted earnings over the past 10 years, which provides a more stable picture than the standard P/E ratio.
Today we are at a value of around 36x. Looking at historical data going back to 1900, the 10-year return for the S&P 500 was negative 84% of the time at a CAPE ratio of 36x.
Take for example the late 1990s, during the dot-com bubble. At the time, the CAPE ratio was extremely high, above 40. The next decade saw low or negative returns.
In fact, in the years following the 2008 financial crisis, the CAPE ratio was relatively low, coinciding with a period of strong returns in the following decade.
Why is this bullish for Bitcoin?
A high CAPE ratio for stocks means that valuations are high and future returns may be limited.
When investors see a high CAPE, they may worry about the risk and low potential returns of stocks in the coming years. This creates a scenario where Bitcoin could become more attractive, and this is where the idea of Bitcoin as a “liquidity sponge” comes into the picture.
When investors see that stocks are historically expensive and can potentially offer low or even negative returns (as is often the case with a high CAPE ratio), they look for alternatives for growth.
Bitcoin, which has no direct correlation with traditional stock markets, could be an interesting option due to its unique characteristics as a scarce, inflation-resistant digital asset.
Investors who withdraw from overvalued stocks can reallocate their liquidity to assets with higher upside potential.
Bitcoin can act as a “liquidity sponge” here, with capital that would normally go into equities flowing into Bitcoin. Because Bitcoin is a relatively small market compared to stocks, an influx of capital can cause a sharp price increase.
There are therefore reasons why liquidity will flow towards Bitcoin, but also assets such as gold, due to this development. Why? Because gold and Bitcoin cannot be “too expensive”, as is the case with stocks.
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Source: https://newsbit.nl/indicator-voorspelt-ellende-voor-aandelen-goed-voor-bitcoin/
