When the stock market goes down, do crypto values follow? To put it another way, is there a correlation between the performance of cryptocurrencies and stocks?
The answer, confusingly, is ‘yes and no’.
Here, I’m going to look at the relationship between cryptocurrency prices and stock values to see what happens when we see the stock market down.
In the Beginning
In the early days of crypto, digital assets such as Bitcoin and Ethereum proved popular due to their lack of correlation with traditional stock and investment markets.
Crypto provided a safe haven away from the turbulent waters of broader macroeconomics. However, fast forward to 2023 and the picture is entirely different altogether.
Problematic
As the digital asset landscape becomes both clearer and more widely known, the narrative surrounding the market continues to evolve.
In the past three to five years, we have witnessed many professional investment firms getting involved in the space, prompting record growth. Despite the crypto winter of 2022, some of the biggest names in finance continue to accumulate crypto.
Serious investment obviously means serious amounts of capital entering and leaving the market, which directly impacts price action.
Due to the lack of consistent regulation, the market is open to manipulation through the block buying and selling of digital assets. While this may be problematic for those trying to trade trends, legality is a grey area and there is little anyone can do.
Through the sheer size of numbers, this large-scale activity is slowly bringing the crypto market in line with traditional finance.
Like the traditional equity market, several external factors also affect the crypto market. These include:
- Supply.
- Demand.
- Investor sentiment.
- Monetary policy.
- Economic conditions.
- Geopolitics.
- Regulatory changes.
‘Safe Haven’
Investors started to take notice of the crypto market sometime in late 2016, when Bitcoin passed and held the $1,000 mark. This event brought the inevitable media spotlight, which in turn brought masses of retail investors, pushing the price of Bitcoin close to $20,000 by the end of the year.
The resulting crash down to $3,000 caught many people by surprise. On reflection, it presented an excellent buying opportunity for those looking to get in.
Then, of course, along came the Covid-19 pandemic. The inevitable slowdown of business worldwide saw the stock market down as traditional investors exited. At the same time, there was a rush to Bitcoin in search of a ‘safe haven’ for funds.
This surge of interest propelled Bitcoin from lows of $5,000 in early 2020 to almost $70,000 some 18 months later.
Stock Market Down
At the same time, the S&P500 lost more than 110 points as investors sought alternative investments.
This sparked the start of worldwide financial turmoil and uncertainty, exacerbated by other factors.
Bitcoin’s ‘safe haven’ reputation through the pandemic cemented crypto’s provision for alternative investment. Cryptocurrency has since continued to attract many committed investors of all levels.
As popularity increased, so did the infrastructure for investment. ETFs, 401k’s (pension funds), and other crypto investment vehicles have risen in popularity since the end of the pandemic. There appears to be no end or limit in sight.
With institutions providing familiar financial products to access the crypto market, further interest is generated among curious participants. This flywheel effect is helping push crypto closer to mainstream acceptance and adoption.
Stock Market Down, Crypto Down?
By mid-2022, major cryptocurrencies were behaving in close correlation with equity prices, especially the Nasdaq and S&P500.
No one knows for sure whether this is a coincidence or correlation. However, one would have to suspect the latter due to crypto’s high-profile rise in popularity.
When the Federal Reserve announced it was increasing its targeted federal funds range on 4 May, 2022, the very next day the Nasdaq, SPX500, and the price of Bitcoin all recorded new lows.
So yes, in that situation, it was a case of stock market down, crypto down.
Future
What does this mean for investors?
While markets may have suffered throughout 2022, it is widely anticipated that prices will make a comeback in the near to medium-term future.
With much of crypto still in the price discovery range, there is plenty of room for upward momentum. Furthermore, as I mentioned above, institutional investors are treating crypto like they would any other stock, suggesting that any future investment is likely to be significant.
However, without regulation, the crypto market will always be open to manipulation, which is dangerous and can put off investors.
As always, anyone looking to invest in cryptocurrency should conduct their own research and perform due diligence before parting with their hard-earned cash.
