From 2009 to the late 2010s, Bitcoin's lack of correlation with the broader economy proved a mixed blessing. It acted as a haven for investors interested in an asset class independent of the turmoil that afflicts stock markets. However, increased and growing awareness from retail and institutional investors since 2017 has created what appears to be a correlation between prices on the stock and cryptocurrency markets.
Learn what affects the cryptocurrency and equities markets and how there could be a correlation between them.
- Cryptocurrency and stock prices are somewhat correlated after accounting for cryptocurrency's volatility.
- Many of the factors that affect stock prices also affect cryptocurrency prices.
- Investors and traders treat cryptocurrency the same way they treat stocks, so prices tend to trend the same.
- You should be cautious when investing in cryptocurrency because it is still new—the market is exploring its role as an asset.
What Factors Affect Stock and Cryptocurrency Prices?
The equity market has been preferred by investors for a long time. As a result, the factors that affect stock market prices and performance have been studied extensively.
The table below lists some factors that affect the stock and cryptocurrency prices.
|Factors That Affect Prices|
|Investor sentiments||Investor sentiments|
|Economic conditions||Economic conditions|
|Monetary policy||Monetary policy|
|Regulatory changes||Regulatory changes|
|Stock issuer financial health||Development changes|
Supply and Demand
It's fairly well known that supply and demand significantly affect the prices of products and services. These influences also affect the price of equities; it appears that they also affect Bitcoin. There will only ever be 21 million Bitcoin created—the future supply is dwindling while demand increases, which raises its price. Other cryptocurrencies follow suit as investors explore them for investment opportunities.
Investor Sentiments and Expectations
One of the most significant factors that have to do with prices is investor sentiment. In the equities market, investor sentiment is the expectation investors have for the market. In this regard, they are grouped into two segments—those who believe prices will increase; and those who believe prices will decrease. They then base their investing decisions on their outlook.
How the economy is behaving has a significant impact on investment prices. The economy, measured by gross domestic product, increases and decreases over time. It has natural cycles it follows, but macro events can force it into specific portions of the cycle. For example, the COVID-19 pandemic in 2020 caused an economic downturn that resulted in a short recession and plummeting stock market prices.
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. Additionally, monetary policy measures taken to fight the effects of inflation can slow economic growth, in turn affecting stock and cryptocurrency prices.
Political decisions between different countries influence the stock market and cryptocurrency prices because trade restrictions or other political actions can affect the supply of materials, labor forces, shipping, and more. As a result, those who invest in assets affected by political actions fear price instability or volatility and buy or sell according to their beliefs.
Regulatory changes influence cryptocurrency and stock prices. For example, in 2021 the Chinese government was pressuring mining farm operators to shut down and leave. Large mining operations began moving in late May. In June, Sichuan Province introduced measures that declared them illegal. Bitcoin's price dropped from about $53,000 to $32,000 by the end of July, and China effectively banned cryptocurrency in September. Bitcoin's price recovered after miners relocated, but it wasn't until October that prices reached previous levels.
Cryptocurrencies, at their most fundamental level, are data. They are managed by software created and maintained by developers. Development issues with the software or disagreements between developers can cause concern for investors. For example, when Bitcoin Cash emerged after a hard-fork from Bitcoin in July 2017, investors reacted, and Bitcoin's price dropped nearly $600.
Cryptocurrency Prices vs. Stock Prices
Interest in Bitcoin and cryptocurrencies as an investment asset class emerged sometime around late 2016, as witnessed by the slow, steady price increases through that year into 2017 when Bitcoin's price crossed $1,000. Media outlets covered the phenomenon, and prices climbed throughout the year to peak at nearly $17,000 before settling down to fluctuate between $3,000 and $10,000. The COVID-19 pandemic in 2020 created a significant worry for investors, who panicked because businesses and economies were slowing and shutting down.
Many investors fled the stock market and placed their assets in Bitcoin during the pandemic, whose price quadrupled through 2021, then fell to hover around $30,000 until May 2022, when its price began to drop and fell below $30,000 for the first time since June 2021.
During the pandemic, the S&P 500—the stock index used most by investors to gauge the market—lost more than 110 points as investors transferred their assets to alternative investments. The U.S. economy floundered into a short recession, then began a recovery in which stock prices climbed to more than double their value at the end of the recession.
By the time the index and economy had recovered to pre-pandemic levels, investors were convinced that Bitcoin was a new asset class that could be used to realize returns under some of the most austere market conditions. Many corporations had already begun to sink money into cryptocurrency, and Bitcoin's performance during the pandemic reinforced their positions and outlooks. Bitcoin had made its investing debut and attracted a large following of retail investors, institutions, and enterprises.
Bitcoin, which had been traded like a stock for several years on cryptocurrency exchanges by early adopters, began to be treated like a stock by traders and investors—solidifying its position as an asset class.
Crypto Price Correlation
As Bitcoin morphed into an asset class, more interest was created. Brokerages and institutions gained traction with regulators and offered investment opportunities like Bitcoin-linked ETFs and 401(k)s that allowed investors to place Bitcoin in them. Because institutions were providing familiar instruments, investors appeared to become more comfortable with cryptocurrencies.
In late 2021 and into mid-2022, cryptocurrency prices rose and fell similarly to equity prices. The chart below shows Bitcoin's (BTC) price compared to the S&P 500 (SPX) and the Nasdaq 100 (NDX).
It's important to note that the graphs overlay each other for a comparison of returns over the time period.
SPX is a measurement of the performance of large-cap stocks. NDX measures the performance of 100 of the largest non-financial companies listed on the exchange; most of them are involved in technology. The graph shows SPX, NDX, and BTC price history from November 2021 to May 2022. You can see prices of each rising and falling with each other—although Bitcoin demonstrates much more volatility—suggesting that Bitcoin is viewed and treated very much like a stock by traders and investors.
The cryptocurrency price correlation that has emerged appears not to be that Bitcoin is related to equities in any way but instead that investors and traders are inadvertently creating a correlation. They are trading Bitcoin the only way they know how—the same way the asset classes they are most familiar with are traded.
What Does It Mean for Investors?
Cryptocurrency's price correlation with equity could be a coincidence or indicate that cryptocurrency prices are indeed following trends in equity prices. So, what does this mean for investors?
It is possible that because investors appear to be treating cryptocurrency like stocks, digital assets can react to market influencers just like equities do. For example, on May 4, 2022, the Federal Reserve announced that it was increasing its target federal funds range to 0.75%–1%. On May 5, 2022, Bitcoin fell to around $31,000. NDX lost about 1,400 points, and SPX lost about 150 points. The cryptocurrency price was much more pronounced, but the effect was the same.
It is also likely that investors, as a whole, are treating cryptocurrency the way they treat equities temporarily. Cryptocurrencies are still in their price discovery phase, where the market is determining the role they will play. When they were first introduced, investors paid them no attention.
Once it was noticed that you could purchase a bitcoin, hold it, then sell it for more, investors became interested. There was no market experience with digital assets, so prices fluctuated wildly as the market began experimenting and speculating.
What this means is that investors should approach cryptocurrency cautiously. It is difficult to tell how the market and prices will act in the future. Bitcoin and other cryptocurrencies could remain correlated to equities, or they might not. If you're interested in investing in cryptocurrencies, it's best to talk to a professional financial advisor familiar with them. They can help you determine what is best for your financial circumstances and investing goals.
Is the Crypto Market Correlated to the Stock Market?
There does appear to be a crypto investment and trading activity that emulates the stock market based on price data.
Do BTC and ETH Have Correlation?
According to Tradingview, BTC and ETH appear to correlate, suggesting that cryptocurrencies, in general, have been trading similar to each other.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
S&P Global. "S&P 500."
South China Morning Post. "China’s Cryptocurrency Crackdown Intensifies as Sichuan Province Orders a Stop To Mining Operations."
The State Council of the People's Republic of China. "Circular on Further Preventing and Disposing of Hype Risks in Virtual Currency Transactions Yin Fa."
Coinbase. "Bitcoin Price."
ProShares. "ProShares Bitcoin Strategy ETF."
Fidelity. "Fidelity Investments Advances Leading Position as Digital Assets Provider With Launch of Industry’s First-of-Its-Kind Bitcoin Offering for 401(k) Core Investment Lineup."
Board of Governors of the Federal Reserve. "Implementation Note issued May 4, 2022."
TradingView. "Bitcoin to USD." Click on plus symbol next to BTCUSD, search for USD, add to chart.
TradingView. "Bitcoin to USD." Click on plus symbol next to BTCUSD, search for ETHUSD, add to chart.