At first instance, it appears that the cryptocurrency and equities markets are correlated, However, this is not the case as it is an indication of how the digital asset class is being treated by the market that is giving it such an appearance.
From its introduction in 2009 to the mid-2010s, there was a real lack of awareness and understanding about Bitcoin and the crypto economy by the broader financial market. During this period, investors largely speculated on the emerging financial technology.
However, as awareness grew, so did investor interest, and prices. The market began treating Bitcoin as an investment or speculative opportunity, resulting in prices beginning to rise and fall dramatically based on investor sentiments, economic circumstances, regulatory actions, and other factors that affect traditional markets.
Investors view Bitcoin from several perspectives. Some consider it to be a store of value, others compare it to stocks as something that is bought and sold through its cycles for a profit. Both the crypto and stock markets are home to significant speculative investment and draw parallels in their volatility and potential for high returns.
Given that both share the common trait of being speculative assets, which are products traded on price speculation rather than intrinsic value, there is a belief that the movement of one asset can reflect the market’s risk appetite, allowing to predict the future behavior of Bitcoin.
What Affects Bitcoin and Stock Prices?
Considering that cryptocurrencies are treated similarly to stocks, bonds, and commodities, the factors affecting their prices are the same. While Bitcoin is issued based on a proof-of-work consensus, other cryptocurrencies are often issued by companies to raise funding, making them security tokens. From this aspect, crypto assets would likely be treated much more like stocks than speculative assets because their value would be associated with how the company is evaluated.
Let us look into the various factors that affect the price of Bitcoin and stock prices.
1. Supply and Demand
The supply and demand metric significantly influences the price of equities. It appears that they also affect the market value of Bitcoin and other cryptocurrencies. For reference, there will only ever be 21 million BTC in existence, meaning that its future supply is decreasing while demand is increasing.
The relationship between the supply and demand of an investment, product, or service, can influence its price. Since Bitcoin is treated like a commodity, property, and investment, it also responds to these pressures.
2. Investor Sentiment
Investor sentiment is the expectation investors have for a stock, commodity, or crypto market. This metric is grouped into two categories – one with those who believe that prices will increase and the other consisting of those who believe prices will decrease.
Bitcoin and cryptocurrencies that are popular with investors tend to follow these conditions. In one instance, a media outlet accidentally revealed that the US Securities and Exchange Commission (SEC) had approved a spot Bitcoin exchange-traded fund (ETF) in October 2023. However, this was false, but the price of BTC rose nearly $2,000 in mere hours following the announcement, before dropping back to previous level shortly after.
It was the expectation by investors that fueled this rapid rise in Bitcoin price.
3. Economic Conditions
The behavior of the economy also leaves a significant mark on the price of investments. Generally, the performance of an economy is measured by changes in gross domestic product (GDP), which increases and decreases over time.
While it has natural cycles that it follows, macro events can force it into specific portions of the cycle. During the COVID-19 pandemic in 2020, economies all over the world faced a downturn that resulted in a short recession and stock and crypto prices plummeting.
4. Monetary Policy
Monetary policies like changes to borrowing interest rates cause investments like stocks, bonds, and crypto to produce higher or lower yields. This causes investor interest in speculative assets to decrease. Additionally, monetary policy measures undertaken by governments to fight the effects of inflation can slow economic growth, which inturn negatively affects the price of stock and cryptocurrencies.
5. Geopolitics
Political decisions made between different countries can also influence crypto and stock prices alike because trade restrictions or other political actions can affect the supply of materials, labor, and shipping among others. As a result, investors who put their money in assets affected by political actions fear price instability or volatility, causing them to buy or sell these assets accordingly.
6. Regulation
Regulatory changes greatly affect the price of stocks and cryptocurrencies. For example, in 2021, the Chinese government completely banned crypto-mining farms in the country. This led to large Bitcoin mining operations moving out of the country, resulting in the price of Bitcoin dropping from about $53,000 to $32,000 within two months.
Similarly, in January 2024, after the US SEC approved the first batch of spot Bitcoin ETFs, the price of BTC began to climb. It went from about $50,000 at the beginning of the month to nearly $74,000 by March, which is its highest recorded price for the apex cryptocurrency to date.
Final Thoughts
Bitcoin and the cryptocurrency market has come a long way from its humble beginnings as a payment method. Today regulators, investors, and enthusiasts are debating whether they should be considered an investment asset, a currency, and a novelty all at the same time.
The reason why its price and performance closely resembles to that of stocks is because traders and investors treat it in the same way they would any other asset – either as a store of value, to protect capital, generate income from trades, or speculate on price actions.
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