Is there now a closer correlation between stock markets and Bitcoin movements?

When Bitcoin debuted 12 years ago, there was a distinct lack of correlation between digital assets and stocks. It did not take long before the market development materialized into a concrete connection between the two. Today, trading with the world’s first cryptocurrency and transactions within traditional stock markets seem to go hand in hand.

The connection has become clearer, driving many global financial bodies to offer solutions and set rules to regulate the intersection of two similar, yet different, economic worlds. As an asset class, cryptocurrencies have moved from the fringes to the mainstream, raising the potential for a ripple effect in investor sentiment on other asset classes, particularly equities.

In fact, crypto’s correlation with stocks has even risen higher than between stocks and other assets such as bonds and gold, according to a 2022 IMF report. In simple economic terms, supply and demand are the main drivers behind the prices of products and services, not least the value of stocks . Bitcoin trading also follows the same principle given the fixed supply of 21 million of them.

In addition to supply and demand, various other factors can shape the relationship between cryptoassets and stocks, including monetary policy, political instability, economic conditions and institutional investment. From late 2021 to mid-2022, these factors were at the intersection of Bitcoin and stocks globally and had a more tangible impact on US and Asian markets.

According to the IMF, crypto and financial markets in Asia were worlds apart before the pandemic. Over the past year or so, the lines between the two have become blurred and further regulatory action appears to be necessary. For example, the correlation between Bitcoin and the Indian stock markets has grown 10-fold in the wake of the pandemic.

Another interesting market sentiment is that most investors equate Bitcoin or crypto with technology stocks due to the rapidly increasing use of the underlying blockchain technology. The belief from an investment standpoint is that blockchain provides utility, contrasting Bitcoin and its traditional counterpart gold, which does not.

This thinking has led investors to recognize that Bitcoin is more than a currency or digital proxy for gold, but is built on technology that will power the upcoming web3 and DeFi applications. But does this mean that stocks and cryptocurrency must be treated equally?

Well, this is difficult to answer due to the nascent nature of the crypto industry. Digital assets still require more time to develop as their own distinct asset class. As crypto matures and its market cap fluctuates between hundreds of billions to trillions of dollars, it is expected to gain more and more popularity among individual and institutional investors.

In the next couple of years, crypto will have a life of its own, with a unique identity and market characteristics, not just mimic stocks and tech stocks. Still, the alignment of stocks and crypto is not so bad as it gives traditional investors a new way to diversify their portfolios.

Nothing really. No matter how closely crypto tracks the stock market, it is a volatile and risky asset.

The only thing to note is not to jump on the bandwagon when short-term market swings happen due to CPI data statistics, employment updates, uncertain geo-conflicts or the occasional Musk tweet that might happen. More than ever, the evolving crypto-share movement requires a comprehensive framework to regulate the financial market through government policies and help reduce the risks associated with investments. R

Regulatory efforts should be accompanied by crypto literacy initiatives to inform investment decisions and eradicate the anonymity of this nascent asset class. Only time, development and adoption will tell how close the links between crypto and stocks will continue.

– The author is CEO, DIFX Technology.