Since Bitcoin (BTC) first hit the market in 2009, many investors have traded the crypto asset as a means of diversifying their portfolios. It was clearly negatively correlated to the broader asset market for almost a decade, and viewed by many as a safe haven during stock market turmoil.
The factors that affect the stock market and cryptocurrencies are really quite similar though – supply and demand, economic conditions, regulatory changes, monetary policy, market sentiment, and geopolitical conditions all have an impact on the price of both assets, so some positive correlation seems to have been inevitable eventually – a correlation that can be easily measured via trading platforms.
In the last few years, we’ve seen the growth of a far more positive relationship between the stock market and BTC as it’s become widely popular, with many experts attributing the recent convergence to a few factors, particularly economic conditions.
Bitcoin gained popularity during geopolitical uncertainty
Back in 2016, the price of Bitcoin hit a high of $903, a 54% increase over the course of the year, and its highest price since 2013. During that year, the online currency, which was still poorly understood by the majority of the public, gained media coverage and interest from hedge funds, brokerage firms, and institutional investors.
Traders at the time felt there was safety in moving to the asset while there was geopolitical uncertainty, with things like Brexit negotiations happening and President Trump taking office.
A broader interest in crypto, specifically Bitcoin, was again experienced during the early days of the pandemic in 2020, as many businesses and economies were slowing down to a halt during lockdowns, and the U.S dipped into a short period of recession, traders fled the stock market for alternative investments, making the asset even more mainstream. The price of BTC quadrupled throughout 2021.
By the time the stock market had recovered and started to rebound again in mid-2020, Bitcoin had become established as a popular asset class by professional and retail traders alike, and has tended towards being traded in a similar fashion to the stock market since.
Inflation and Interest Rates
From late 2021 to mid-2022 the stock market and Bitcoin has shown very close correlation, as many retail investors have struggled with the everyday cost of living as a result of high inflation and rising interest rates, this combined with the risk factor of BTC may have pushed many to sell. Both the stock market and BTC have suffered substantial losses during this period, which has also seen unrest from the conflict in Ukraine and supply chain issues globally.
Reuters reported in August 2022 that Bitcoin has been consistently tracking with the Nasdaq since November 2021, and that the 40-day correlation to the tech-based Nasdaq is sitting at 0.9 in July, which is up from 0.41 in January 2022 and represents near-perfect tracking.
Experts believe that this correlation will not last though, as economic conditions will return to normal the asset is expected to go back to trading uncorrelated.
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