Is There a Cryptocurrency Price Correlation to Equity Markets? (2024)

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 and other cryptocurrencies. For example, there will only ever be 21 million Bitcoin created—the future supply is dwindling while demand increases, which tends to raise its price over time. 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.

Cryptocurrencies more popular with investors tend to follow these conditions as well, although at an intensified rate. Bitcoin is the prime example here—based on its massive gains since it was introduced, many investors expect more from it. This is evident in many instances—for instance, a media employee accidentally announced that the Securities and Exchange Commission had approved a Spot Bitcoin Exchange Traded Fund in October 2023. The SEC had not approved one, but Bitcoin's price rose nearly $2,000 in a matter of hours after the announcement, then dropped back to its previous level shortly after that. Investor expectations (and hopes) fueled this rapid rise and fall.

Economic Conditions

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

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.

Geopolitics

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.

Regulation

Regulatory changes influence cryptocurrency and stock prices. For example, in 2021, the Chinese government pressured 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.

Developmental Issues

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 by 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.

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 by its end.

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, attracting 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. Because institutions were providing familiar instruments, investors appeared to become more comfortable with cryptocurrencies.

From late 2021 into 2022 and through 2023, cryptocurrency prices rose and fell similarly to equity prices (albeit with much more volatility). The chart below shows Bitcoin's (BTC) price compared to the S&P 500 (SPX) and the Nasdaq Composite (ICIX) from November 2022 to November 2023.

SPX is a measurement of the performance of large-cap stocks. ICIX measures the performance of 2,500 capitalization-weighted stocks on Nasdaq. You can see prices 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. The Nasdaq 100 (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.

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 circ*mstances and investing goals.

The Botton Line

Bitcoin has come a long way from its meager beginnings as a payment method. Regulatory and classification debates between regulators, fans, and investors continue—but the cryptocurrency keeps demonstrating it is an investment asset, a currency, and a novelty all at the same time. Its price loosely correlates to stock market prices, likely because traders and investors treat it the same way they would any other asset—as a way to store value, protect capital, generate income from small trades, speculate on price actions, and more. The longer it survives in the market, the more investors will use it in their strategies.

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