Bitcoin and Ethereum prices usually mirror the stock market. Is it changing?

Bitcoin and ethereum prices have been unusually stable in recent days. That’s notable for crypto — notorious for its price volatility — especially as the stock market closed its worst September since 2008 last week.

The crypto and stock markets have generally moved together this year. So some crypto investors may be wondering if the two are starting to diverge as bitcoin and ethereum held steady while the stock market plunged. Experts aren’t so sure, at least not yet.

Bitcoin’s price has been above $20,000 since it soared above Wednesday afternoon, but there’s no guarantee it will stay there or push further higher. The token has struggled to stay above the key price point for the past two weeks, mostly sticking to the low 19,000 range. At times, the token has dipped into the $18,000s. Ethereum has followed a similar trend, sticking to the $1,300 range and occasionally swinging above and below this price over the past two weeks.

Despite these declines – down more than 60% since the beginning of the year – the tokens have remained resilient over the past two weeks as share prices collapsed. It may indicate that the correlation between crypto and the stock market may be loosening, but it is not enough to break free just yet.

“They’re still very correlated,” said Ben McMillan, CIO of IDX Digital Assets, an asset management firm in crypto and digital assets.

“We expect they won’t be as well correlated going forward,” he said. “But I think a positive correlation between bitcoin and risk assets, especially things like tech stocks, is here to stay. It’s something investors need to think about in their positioning now that they can no longer necessarily rely on a low correlation between bitcoin to tech stocks or bitcoin to stocks going forward.”

So, what will it take for crypto to break out of the stock market? We asked experts to find out.

Will Bitcoin and Ethereum Prices Ever Stop Tracking the Stock Market?

Over the past year, crypto has closely followed the stock market, especially technology stocks. The correlation was seen most acutely over the summer, when the correlation between bitcoin and the S&P 500 was almost one-to-one.

These digital assets were designed to operate outside the mainstream financial system, but investors’ evolving understanding of tokens as they became more popular over the past couple of years created a connection n between crypto and the stock market.

“This should be an uncorrelated asset,” said Douglas Boneparth, CFP and president of Bone Fide Wealth. “But as the market capitalization has increased, people see it as a risky asset, as they should, but they don’t see it as an alternative to risky assets. They’re piling into bitcoin just like their tech stocks.”

A growing understanding of the underlying technology, also known as the blockchain, has led investors to treat crypto similarly to tech stocks, according to McMillan. He points out that blockchain actually provides utility, and contrasts bitcoin and the like to gold, which does not provide utility. Through that, investors recognize that bitcoin is not just a digital proxy for gold, McMillan explained, but built on technology that will power things like web3 and DeFi. As a result, crypto began to trade more like a technology stock.

So, what will it take for crypto to stop tracking the stock market? It needs more time to develop as its own distinct asset class, according to both McMillan and Boneparth. How – and if – it pans out is still up in the air.

One possible way for crypto to get there is to gain more practical use, and for that it needs supporting infrastructure, according to Boneparth. Integrating crypto wallets with iPhone wallets and being able to tap and pay just like you do with your credit card will allow for more convenience.

“As the bitcoin and ethereum ecosystems evolve, they will begin to have their own idiosyncratic risks,” McMillan said. “Right now they are still acting as technical proxies. But as the bitcoin and ethereum ecosystems evolve, as more applications are built on top of them, as the use cases become broader and more diversified, I think it will start to look more like their own distinct asset classes.

If that happens, we can expect a decoupling between crypto and tech stocks.

What should crypto investors do as digital assets continue to trail the stock market?

Nothing. Crypto is a volatile and risky asset, and this will be true regardless of whether its performance follows the stock market or not. And the effects will continue to be supercharged in this time of economic uncertainty in the United States

This year’s financial narrative has largely hinged on the Federal Reserve’s moves to combat inflation – and that is likely to continue in the final months of the year. The Fed will likely continue to raise interest rates to fight inflation, which will have necessary pain points for the economy and will likely send crypto and stocks reeling.

Experts say you should allow your investments to trickle down; avoid selling low in a panicked frenzy after buying high. For now, you want to take a long-term perspective and give your investments the time and breathing room they need to mature.

Experts suggest dedicating no more than 5% of your portfolio to crypto and only invest what you are willing to lose. And be careful not to make impulsive moves when the crypto market suddenly falls, as it often does.