Is There a Cryptocurrency Price Correlation to the Stock Market?

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Is There a Cryptocurrency Price Correlation to the Stock Market?

Bitcoin’s lack of association with the larger economy was a mixed blessing from 2009 to the late 2010s. It served as a safe refuge for investors seeking an asset class unaffected by the instability that afflicts stock markets. However, since 2017, greater and rising knowledge among individual and institutional investors has resulted in what seems to be a link between stock and cryptocurrency market values.

Learn what influences the cryptocurrency and equity markets, and how they may be related.

Key Takeaways

  • After accounting for bitcoin volatility, cryptocurrency and stock prices are slightly connected.
  • Many of the same variables that influence stock prices influence bitcoin prices.
  • Because investors and traders regard cryptocurrencies in the same manner they do equities, prices tend to follow suit.
  • When investing in cryptocurrencies, you should exercise caution since the market is still figuring out how to utilize it as an asset.

What Factors Affect Stock and Cryptocurrency Prices?

For a long time, investors have chosen the equities market. As a consequence, the elements that influence stock market prices and performance have been thoroughly researched.

The table below summarizes some of the variables that influence stock and cryptocurrency values.

Factors That Affect Prices
Equity MarketCryptocurrencies
SupplySupply
DemandDemand
Investor sentimentsInvestor sentiments
Economic conditionsEconomic conditions
Monetary policyMonetary policy
GeopoliticsGeopolitics
Regulatory changesRegulatory changes
Stock issuer financial healthDevelopment changes

Supply and Demand

It’s common knowledge that supply and demand have a substantial impact on product and service pricing. These factors impact the price of shares, and it seems that they also affect Bitcoin. There will only ever be 21 million Bitcoin created—the future supply is reducing as demand grows, driving up the price. Other cryptocurrencies will follow suit as investors investigate them for potential investment possibilities.

Investor Sentiments and Expectations

Investor sentiment is one of the most important price-related elements. Investor sentiment in the stock market refers to investors’ expectations for the market. They are divided into two groups in this regard: those who think prices will rise and those who feel prices will fall. They then make investment selections based on their perspective.

Economic Conditions

The state of the economy has a considerable influence on investment pricing. The economy, as measured by gross domestic product, grows and shrinks throughout time. It follows natural cycles, although macro events may drive it into certain parts of the cycle. For example, in 2020, the COVID-19 pandemic produced an economic slowdown that culminated in a brief recession and dropping stock market values. 1

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Monetary Policy

Monetary policy changes, such as interest rate cuts, may lead bonds to offer lower yields, reducing investor interest—they believe they can receive greater returns elsewhere. Furthermore, monetary policy measures used to combat the impacts of inflation might limit economic development, influencing stock and cryptocurrency values.

Geopolitics

Because trade restrictions or other political activities may affect the availability of resources, labor forces, transportation, and other factors, political choices between various nations have an impact on the stock market and cryptocurrency values. As a consequence, people who invest in assets impacted by political acts are concerned about price volatility and purchase or sell based on their opinions.

Regulation

Regulatory changes have an impact on cryptocurrency and stock values. In 2021, for example, the Chinese government was encouraging mining farm owners to shut and depart. Large mining activities started in late May. Sichuan Province passed legislation making them illegal in June. 2 By the end of July, Bitcoin’s price had plunged from over $53,000 to $32,000, and China essentially outlawed cryptocurrencies in September. 3 Bitcoin’s price rebounded once miners moved, but it took until October for prices to return to pre-relocation levels. 4

Developmental Issues

At their most basic level, cryptocurrencies are data. They are handled by software that engineers design and maintain. Investors may be concerned about software development concerns or conflicts amongst developers. For example, when Bitcoin Cash appeared as a result of a Bitcoin hard-fork in July 2017, investors reacted negatively, and Bitcoin’s price plunged by roughly $600.4.

Cryptocurrency Prices vs. Stock Prices

Interest in Bitcoin and cryptocurrencies as an investment asset class began in late 2016, as seen by the modest, consistent price gains that year and into 2017, when Bitcoin’s price exceeded $1,000. The occurrence was publicized by the media, and prices rose throughout the year, peaking at over $17,000 before settling down to oscillate between $3,000 and $10,000. 4 The COVID-19 pandemic in 2020 caused major concern among investors, who panicked as companies and economies slowed and shut down.

During the pandemic, many investors left the stock market and invested in Bitcoin, whose price doubled through 2021, then declined to stay at $30,000 until May 2022, when it started to fall and went below $30,000 for the first time since June 2021. 4

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During the epidemic, the S&P 500—the most commonly used stock index by investors to evaluate the market—lost more than 110 points as investors shifted their assets to alternative investments. 1 The United States’ economy entered a brief recession, then started a rebound in which stock values more than doubled their value by the conclusion of the recession.

By the time the index and the economy had returned to pre-pandemic levels, investors were persuaded that Bitcoin was a new asset class capable of generating returns even in the most difficult market situations. Many firms had already started to invest in cryptocurrencies, and the success of Bitcoin during the epidemic strengthened their positions and outlooks. Bitcoin has made its investment debut, attracting a sizable following of individual investors, institutions, and businesses.

Bitcoin, which had been exchanged on cryptocurrency exchanges as a stock for many years by early adopters, started to be regarded like a stock by traders and investors, strengthening its place as an asset class.

Crypto Price Correlation

More interest was generated when Bitcoin evolved into an asset class. Brokerages and institutions gained regulatory momentum by offering investment alternatives such as Bitcoin-linked ETFs and 401(k)s that enabled investors to invest in Bitcoin. 56 Investors seemed to get more comfortable with cryptocurrencies as institutions provided familiar tools.

In late 2021 and early 2022, cryptocurrency values climbed and dropped in tandem with equities prices. The chart below compares the price of Bitcoin (BTC) to the S&P 500 (SPX) and the Nasdaq 100. (NDX).

It’s worth noting that the graphs overlap to allow for a comparison of returns over time.

TradingView

The SPX index measures the performance of large-cap equities. The NDX monitors the performance of 100 of the exchange’s biggest non-financial firms, the majority of whom are engaged in technology. The graph depicts the price history of the SPX, NDX, and BTC from November 2021 to May 2022. Prices of both are growing and dropping in tandem, with Bitcoin exhibiting much greater volatility, implying that Bitcoin is perceived and handled very much like a stock by traders and investors.

The cryptocurrency price link that has formed seems to be due to investors and traders unwittingly developing a correlation rather than Bitcoin being tied to stocks in any manner. They are trading Bitcoin in the only manner they know how—the same way they trade the asset classes with which they are most acquainted.

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What Does It Mean for Investors?

The price connection of cryptocurrency with equities might be a coincidence or an indication that cryptocurrency prices are genuinely tracking movements in equity prices. So, how does this affect investors?

Because investors seem to be treating cryptocurrencies like stocks, digital assets may respond to market influences similarly to equities. For example, the Federal Reserve announced on May 4, 2022 that it was raising its target federal funds rate range to 0.75%-1%. 7 Bitcoin plummeted to roughly $31,000 on May 5, 2022. 4 The NDX fell around 1,400 points, while the SPX fell roughly 150 points. 18 The impact was the same, even though the bitcoin price was considerably more prominent.

It is also possible that investors are momentarily treating bitcoin in the same manner they handle stocks. Cryptocurrencies are still in the price discovery phase, where the market determines their function. Investors ignored them when they were originally presented.

Investors grew intrigued when it was discovered that you could buy a bitcoin, keep it, and then sell it for a higher price. Because there was no market experience with digital assets, values varied widely as the market experimented and speculated.

This suggests that bitcoin investors should proceed with caution. It is impossible to predict how the market and pricing will behave in the future. Bitcoin and other cryptocurrencies may or may not stay tied to stocks. If you want to invest in cryptocurrencies, you should consult with a competent financial adviser who is knowledgeable with them. They can advise you on what is best for your financial situation and investment objectives.

Is the Crypto Market Correlated to the Stock Market?

Based on pricing data, there seems to be a crypto investment and trading activity that mimics the stock market. 9

Do BTC and ETH Have Correlation?

According to Tradingview, BTC and ETH tend to correlate, implying that cryptocurrencies in general have traded similarly. 10

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site.

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