The cryptocurrency market in the last few years has been loosely dependent on the performance of its golden egg— Bitcoin. Many cryptocurrency traders and analysts have found a way to tie the performance of some altcoins to Satochi’s ingenious token and have managed to consistently predict market outcomes correctly.
In market analysis, this can be defined as market correlation. This phenomenon explains how certain assets perform in relation to one another. A prime example is the movement of stocks in the same industry, stocks in the same sector will oftentimes end up moving in the same trajectory mainly because they are confined and defined by the same factors and are related to one another.
Let’s say there was a shortage of milk in town, all the ice cream stores would be indeed affected because they run the same business. In fact, all businesses that need a supply of milk would be affected too.
A not-so-financial example is the correlation between height and weight. Tall people are likely to weigh more and vice versa. The idea is that a correlation between two (or sometimes more) assets makes it possible to predict the performance of one of the assets once you understand the other pair.
This seems relatively easy when you have assets that are in the same financial sector or are obviously related. However, when it comes to assets that don’t seem to be linked in any way, the correlation becomes much more complex.
Let’s use our ice cream example to buttress the point. If there’s a shortage of milk, it would affect the production of ice cream in one way or the other— that’d be rather obvious. But what if the correlation was not between milk and ice cream?
What if the correlation was between milk and honey? They don’t seem to be related in any way right? However, in financial markets, we see a lot of correlating pairs that seem to be dependent on each other even though they are unrelated.
A prime example in recent times is the Bitcoin correlation to the stock market which we will be discussing in this article. Let’s dive in.
At this point, you’re wondering “How does Bitcoin relate to stock market assets?” Well, the Bitcoin and stock market correlation has been on the radar of financial analysts for some time now. We saw a more intense spike in interest when both Bitcoin and Nasdaq prices dropped to a record all-time low in December 2018.
Since then, there have been numerous other significantly correlating incidents. Some examples include:
Some analysts maintain that these major incidents are just well-timed coincidences. However, there are too many occurrences for these to be described as a coincidence.
The correlation of Bitcoin to the stock market is as unprecedented as it is obvious. Satoshi’s primary reason for inventing Bitcoin was to create a financial system independent of all formerly established systems.
The relatively recent correlation of Bitcoin to the stock market seems to defeat that purpose. To compound matters even further, other cryptocurrencies tend to be driven by the performance of Bitcoin. This means there’s now a correlation between crypto and stock market assets.
The crypto market correlation might not seem obvious until we explore the chart history of the Bitcoin correlation to stock market assets. That’s exactly what we are going to do in this section.
Comparing the two markets, in the last year, we see that the mirroring of Bitcoin and the two have slowly become more and more obvious. At first, the price hikes in November and December of 2021 seem to be abrupt and nonuniform.
However, by the time we follow the trajectory of the chart down to June 2022, we start to see a more uniform and coordinated Bitcoin correlation to the stock market.
This mirroring has over the last six to eight months been consistent as seen in the chart below. Running from the central area of the chart to the bottom right corner.
The breakdown of this chart shows more proof of asset correlation to the market and Bitcoin. Further insight and in-depth analysis of the crypto stock market correlation are available when you consult with the market-making team at Gotbit.io.
The team specializes in analyzing, building, and implementing high-demand solutions to earn profits for clients after market reassessment with the aid of trading tools.
The correlation between Bitcoin and the stock market is not exactly a predictable event. It comes with numerous unfounded relationships that somehow seem to end up making them correlate.
There are a few factors that directly affect the overall price of both markets and influence their trajectory. Some of these factors are shared between the two while some affect only one of the pair. Below is a table showing factors that affect the stock and cryptocurrency market.
Next we will discuss these factors in three segments. We will explore factors affecting both markets, Bitcoin alone, and the stock market alone.
Decoupling is a term that describes the predicted separation of a pair of formerly correlating assets. In layman's terms, we could liken it to a divorce. Asset pairs that mirror each other or are related in any way will at some point separate.
Most times members of the pair end up correlating with other assets and other times, the pair comes back together after a while. This is a common phenomenon in market analysis.
When we talk about Bitcoin decoupling, we will be referring to a predicted separation of Bitcoin from its correlation with the stock market. From a technical point of view, it is the point at which the correlation between Bitcoin and the stock market is negative.
Analysts predict that this decoupling will occur soon. Estimates from crypto enthusiasts expect Bitcoin to rise as high as $1M per coin with the other commodities in the stock market crashing to record lows.
However, there’s a possibility of the opposite happening. Bitcoin could go even much lower than its present value with traditional assets starting to rise in value.
Yes, Bitcoin has been proven to be correlated to the stock market. However, analysts expect an asset decoupling to occur soon.
There are many factors causing the Bitcoin correlation to the stock market. However, a major influence is that investors now see Bitcoin as a more traditional form of investment as opposed to an alternative investment.
Both Bitcoin and stocks have amazing potential to bring investors high returns. However, cryptocurrencies like Bitcoin are highly volatile and too unpredictable. If you’re just starting out, you should start by investing in the stock market as it is safer. If you want to diversify your portfolio, adding Bitcoin and other cryptocurrencies is a good idea.
Yes, analysts have predicted that Bitcoin will decouple from the stock market after a short while.
No, Bitcoin doesn’t stop trading, unlike the stock market, it doesn’t have any trading hours.