When Bitcoin was first introduced in late 2009, no one could have predicted its popularity in the present-day world. At the time, those who did invest in Bitcoin thought of it as an excellent opportunity to invest in an asset class that would be independent of the turmoils of the stock market. The volatile nature of the stock market has been one of the main reasons different investors thought of Bitcoin as a perfect alternative for investing their funds. But with the passage of time and the growing popularity of cryptocurrency, especially in the late 2010s, many people were left pondering over the idea that Bitcoin and Cryptocurrency, in general, are more correlated to Stock Market than anyone would have previously imagined.
There are thousands of different crypto tokens that are available on the crypto exchanges. To answer the question of whether crypto, in general, is related to the stock market, we will choose the most famous cryptocurrency known to everyone around the world: Bitcoin. Since the rest of the tokens follow Bitcoin’s lead regarding their price going up and down, Bitcoin is the best test case to compare the general correlation between crypto and the stock market. This doesn’t necessarily mean that all the cryptocurrencies will follow Bitcoin’s price action, but Bitcoin’s volatility generally reflects the sentiments of the entire crypto community.
Were Bitcoin and Crypto generally correlated to the Stock Market from the beginning?
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. Our investigation into the correlation between crypto and the stock market will constitute the data gathered from the S&P 500 and Bitcoin yearly chart.
During the initial years of cryptocurrency trading, there was practically no correlation between Bitcoin and S&P 500.
In the early 2010s, Bitcoin price was considerably stable, while S&P 500 saw prices going up at a steady pace with occasional dips. In early 2014 Bitcoin’s value jumped significantly, even though not much upward action was happening in the S&P 500 index. Moreover, in 2016 when Bitcoin saw another increase in its value, the stock market went through a dip in the same timeline. In fact, in all these years when Bitcoin prices saw massive upward or downward swings, the stock market saw less drastic price changes. However, in the last 3 or 4 years, you can see that Bitcoin and S&P have gone from being independent of each other’s price actions to being mostly correlated regarding the rise and fall in either market.
We will look into the factors that cause market volatility in both the crypto and stock markets and how much the correlation between the two entities has increased in the past few years.
Common factors that affect Stock and Cryptocurrency prices
Some common factors in crypto and stock markets help drive their respective values up and down.
- Supply and Demand: Most of the crypto community knows that only 21 Million Bitcoin tokens will be available to buy or sell. Out of the 21 Million Bitcoin tokens, 19 Million have already been mined and are currently in circulation in the crypto market. The remaining tokens will be mined by at least 2140. With a current population of about 8 Billion people in the entire world and only a limited number of Bitcoins available to trade for, you can safely assume that Bitcoin has become one of the hottest commodities to own.
With the boom in its popularity in the last few years, Bitcoin’s value has seen an astronomical rise. From a time when 1 Bitcoin had a value equivalent to 1 US Dollar, people also viewed the reality where 1 Bitcoin was worth at least $60,000. This created the demand for this asset even more. Currently, Bitcoin is traded at almost $16,000, the value of Bitcoin in the present day; we can confidently say that Bitcoin will again see a massive rise in its value and may even form new highs in the later years.
An opposite example where so many shares can dilute a crypto coin value can be given of the Shiba Inu token. Shiba has minted 1 Quadrillion coins, and the current market value of 1 coin of Shiba is $0.00000908. This scenario can be seen replicated in the stock market as well. Too many shares issued of one stock may see its value diluted.
On the other hand, a stock share in high demand would generally see more significant bids made by investors to acquire a particular portion of the said stock.
- Investor’s sentiments: Another essential factor affecting the prices of either stock or crypto markets is the sentiments of the investors who invest their money in the said market. Typically there are two types of directions a market can go in order, which is up or down. If the investors feel bullish about a particular stock’s prospects, they will pump money into the said stock, which will drive its value upwards. Similarly, suppose they don’t have a positive feeling about a specific stock due to several factors, ranging from the performance of the said stock in the current market or negative publicity going around it. In that case, they pull their investment from the said stock. The step can prove instrumental in driving the price down of that said stock.
- Current Economic Conditions: The overall performance of the global economy is another factor that impacts the values of both the stock market and the crypto market. The 2019 Covid-19 pandemic is a prime example of why stock markets crashed at that time. The economic downturn caused by the lockdown during the pandemic worldwide caused stock prices to plummet. On the other hand, cryptocurrency fared well during the pandemic. Many people pooled their resources and savings in cryptocurrency to maintain some monetary safeguard for them in case of recession or unavailability of jobs.
- Current Global Political Environment: Unfavorable political conditions between countries can influence the stock market and cryptocurrency prices. They have an impact because any number of factors, like trade restrictions, stoppage of import or export, shortage of labor, etc., can hamper the everyday workings of a country. Consequently, people feel they need more confidence in the current political environment to risk their assets in stocks or cryptos for fear that they might use their holdings for survival purposes and start pulling them out of the market. Others follow for fear that their assets will lose their current value, and the widespread fear in the market causes the stock and crypto prices to fall.
- Monetary Policy: Monetary policy changes such as an interest rate decrease can cause investments like bonds to produce fewer yields, decreasing investor interest—they feel they can get better returns elsewhere. On the other hand, higher interest rates generally mean a lower appetite for high-risk/high-return assets such as cryptocurrencies. In the previous few weeks, we have seen FEDs increasing the interest rates; hence we’ve seen the crypto market decline in recent months.
How much have cryptocurrency and the Stock Market correlated in the past four years?
Bitcoin has mimicked the S&P 500 market movements in the past four years. During the massive dumps in January and September of 2018 and then again in March 2022, Bitcoin’s value also dropped. Past indicators show that the stock market doesn’t get a drop of such a large magnitude compared to cryptocurrency. At one time, when the S&P 500 suffered a decline of 10%, Bitcoin at that time suffered a massive drop of 50%. And when the Bitcoin value sees this much volatility, the Altcoins join soon. We have also seen instances where Bitcoin and other cryptocurrencies see a rise in value when stock prices go up. Bitcoin has recently begun to mimic the stock market even more closely. Bitcoin and the S&P 500’s 90-day correlation reached a record in March. As of 2022, there’s been no sign of a Bitcoin stock market decoupling.
What is the reason behind Cryptocurrency and Stock Market Correlation?
The most common reason behind the correlation between cryptocurrency and the stock market is that they both are affected by the same factors mentioned above. A considerable demand, limited supply, and upbeat investor sentiments can drive both commodities’ prices up. Similarly, low demand, diluted shares, and reservations about the stock’s future drive the costs down for both of them. Also, cryptocurrency is not small a market as it once was. It is being adopted globally, not just by crypto enthusiasts but by multinational organizations.
Where crypto once had a limited number of investors or traders buying and selling cryptocurrencies, now that market has increased to millions of people. Cryptocurrency is no longer seen as a separate asset, with little reliance on the stock market. Instead, the popularity of crypto has made it very similar to traditional stock holdings. So due to this rise in the popularity of cryptocurrency, many investment institutions and brokerage firms have also dipped their toes into the crypto pond.
Also, investors have started to invest in both crypto and stocks parallelly. Whichever medium yields them a good profit, the investors put those profits into their other portfolios and vice versa. As a result, the perception that Cryptocurrency and Stock Market always go hand in hand has increased dramatically.
However, there are some significant differences between them as well. Cryptocurrency’s foremost attribute is that it doesn’t come under the control of any single entity like banks or governments. Its decentralized nature has made it somewhat safe from the intervention of financial institutions or governments alike. But specific actions from these institutions can also affect the price of the crypto market. For example, when the Chinese government banned Bitcoin mining in 2021, the fall out of the decision so a fall in Bitcoin’s value. However, the stock market wasn’t affected at all by this move of the Chinese government. Therefore both these markets are not yet entirely correlated. There are also technological dissimilarities, such as the stock market isn’t affected by data storage issues and power shortages, which affect Bitcoin miners.
Overall there is still a significant correlation between cryptocurrency and the stock market.
Can Bitcoin and the Stock Market stop being correlated?
Currently, it isn’t easy to ascertain whether Bitcoin and cryptocurrency generally can stop correlating with the Stock Market. Most people devise their crypto strategies by simultaneously keeping one eye on the stock market. While this theory doesn’t hold in some scenarios, a similar action occurs across both markets when either one is climbing or falling for several reasons. Big investors are undoubtedly treating cryptocurrency like stocks; therefore crypto market can react to market influencers just like equities do. Our advice to the readers would be to take a cautious approach. No one can precisely predict how prices in both markets will act in the future. Also, crypto traders should study charts before investing in the market. Studying charts is one of the best tools for helping traders make decisions in their best interest.