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Cryptocurrency Correlation: Stock Market Analysis

Anthony Cerullo
October 24, 2022
An white background with the text "is crypto correlated to the stock market?"

The interest in trading and investing in cryptocurrency is growing rapidly. Many traders compare the crypto market to the stock market. Both contain tradable assets and are affected by similar events. This leads many analysts to theorize whether there is a correlation between the two markets. 

Correlation describes a mutual relationship or connection between two or more variables.. 

Other assets that have a defined correlation include gold and fiat currency, like USD. Another is the correlation between food and oil prices. 

The link between these assets is well-documented; when oil prices soar, countries have difficulty keeping their food imports and exports stable. As supply dwindles, these foods become more expensive. 

If stocks have an effect on crypto (and vice versa), traders and investors will have to adjust their strategies. We set out to define what factors correlate cryptocurrency and the stock market, based on historical data and current trends. This guide explains how to approach cryptocurrency, and what to look out for when investing. 

Cryptocurrency Price Trends: What Affects the Crypto Market?

There are several factors that positively and negatively affect crypto and stock market prices. Let’s explore these, and how their effects on each asset can differ.

Supply

Supply has a huge impact on both crypto and stocks. Some cryptocurrencies have an unlimited supply, like Ethereum, while others have a finite supply, like Bitcoin.

Demand

The counterpart to supply. Demand for an asset heavily affects the price. If traders want more of a cryptocurrency, they will also pay more for it.

Economic Conditions

An unexpected event, like the recent pandemic, can cause huge distress to the economy. This makes it harder to expand businesses, which include cryptocurrency. It also means traders are more conservative in their investments. Poor economic conditions mean investors prefer to keep more liquid cash on hand for living expenses rather than risk it on the market.

Geopolitics

International political conflict and actions can cause disruptions to prices in the stock and crypto market. While crypto itself is decentralized, the servers that host trading platforms can be restricted or regulated. Take the Russia-Ukraine war for example. 

Regulations

Regulatory policies and bodies differ from country to country but can impact prices across the globe. Entire governments can even block the trading of a particular asset, as China famously did with Bitcoin numerous times

Issues in Technology

While the foundation of crypto is data stored on the blockchain, this data is not immune from failure. Nor are the platforms that provide cryptocurrency services. Bugs, hacks, and the inability to scale are all relatively common technology problems that affect crypto prices. ,.

Public Sentiments

How investors and traders view the assets, as well as the parties involved with the market, will fuel their decisions. If the majority of investors think prices will rise, they will keep investing. Or if there is overwhelming fear in the market, the price will plummet. 

Suggested reading: Bitcoin Fear and Greed Index: What is this “FOMO” Indicator?

Stock Market Price Trends: What Affects the Stock Market?

There are just as many factors that affect the stock market. The entire market’s prices are heavily affected by supply and demand, which several parties influence. Issuers, who develop and sell stocks, have to follow all the factors that might increase or decrease supply and demand. Stock prices and their volatility are dependent on the reactions of issuers, traders, and investors. The same is said for cryptocurrency blockchain developers, miners, and investors. 

Cryptocurrency Correlation With the Stock Market Throughout History

Financial experts have recorded and compared the prices of stocks and cryptocurrencies starting in 2009.  While the stock market has existed since the 1600s - when the Amsterdam stock exchange was created - crypto is much newer.

The first cryptocurrency can be traced back to 1990 when the company DigiCash created eCash. It wasn’t until 2009 that traders became more interested in cryptocurrency with the rise of Bitcoin. The last decade has seen huge growth for cryptocurrency, alongside the data correlating it to the stock market.

With Bitcoin being the world’s most used cryptocurrency, we can use it in comparison to the S&P 500. The Standard and Poor’s 500 tracks the stock prices of the world’s top 500 companies. In the past ten years, Bitcoin’s ROI (return on investment) soared past that of the S&P 500. From 2011 to 2021, S&P 500 stocks saw a 148% increase in ROI, while Bitcoin saw an astounding 437,171% increase. 

A recent study by VanEck also shows Bitcoin presented traders with less volatility than over 100 S&P 500 stocks. This doesn’t mean that Bitcoin isn’t a volatile asset to invest in, though. It is still risky but could become a better first-time investment for traders than certain S&P 500 stock choices.

Let’s also compare Bitcoin to the Nasdaq Stock Market, based in New York City. Using TradingView, we can compare charts of Bitcoin and Nasdaq Inc., which owns the Nasdaq stock market. 

On the right, we can see the value of the asset in United States Dollars. There are similar peaks in price beginning in d 2020. Currently, the value of a single Bitcoin far outweighs that of Nasdaq Inc. stock. In recent years, stocks and cryptocurrency have moved similarly - falling and rising closely to each other.

The pandemic’s effects on the global economy have made the correlation between the two assets clearer. They reacted comparably amid the new financial conditions and investor outlook, with many looking to invest their money into new prospects. Due to these factors at least, experts agree that stocks and cryptocurrencies are interconnected. 

While the relationship between the two was not so easily provable beforehand, going forward we must be prepared for spillover. The increased interest in cryptocurrency isn’t replacing stocks. Instead, crypto traders will most likely look to the much longer history of stocks for information. Adopting trading techniques usually used for stocks is sure to strengthen the asset’s correlations in the future.

This is also prompting countries to prepare for the co-movement of stock and crypto by reviewing and developing new regulations. In the face of the rapid development of crypto, countries need to have a concrete regulatory framework in place. Rigid supervision may be implemented on crypto traders to prevent risks like data gaps, market manipulation, and criminal activity.

Final Answer: Does Crypto Follow the Stock Market?

We can safely assume that yes, crypto follows the stock market in a number of ways. This is not concrete, though, with new financial events always occurring. The correlation between stocks and virtual assets, like crypto and NFTs, will likely strengthen and become more interconnected. 

Their correlation is sure to produce ripple effects for each market, such as volatility in prices and a change in investor sentiments. For example, a trader could assume that a huge decline in the value of Bitcoin could also negatively impact the S&P 500 stock market. Traders who are investing in either asset should be aware of recent developments in both the stock and crypto markets and apply them to their strategic decisions.

Furthermore, traders should keep an eye out for new regulatory frameworks and policies that countries may develop for crypto. Their requirements could either hinder or progress the crypto industry across the globe.

How to use crypto correlation to your advantage

Crypto’s correlation to the stock market is advantageous to trades. They see this as just another opportunity for data analysis. It’s impossible to predict the stock or crypto market 100% of the time but the more data you have on hand, the easier it gets to make educated predictions. 

YouHodler provides you with the tools to play with market volatility. Whether you think the market is going up or down, you can potentially profit from that using features like Multi HODL and Dual Asset.

Multi HODL allows you to open up multiple long or short positions at the same time with a variety of cryptocurrency assets. You can also set your leverage multiplier level. This helps you manage risk.

Dual Asset is a dual currency investment product. It lets you minimize risk while giving you two different options at the same time for profit. 

Now that you know crypto and stocks are often correlated, you better analyze which direction the market is moving and capitalize off that movement. Head to YouHodler.com today to start playing with your crypto and seeing how to make it work for you.

About the Author
YouHodler Blog Editor

Editor-in-Chief of the YouHodler blog. Connect with him about writing techniques, cryptocurrency, and music.

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