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Decoding the correlation between Bitcoin and the stock market: How to make wiser investments
Source: Bitcoin Magazine Pro Team
Compiled by BitpushNews
When investing in Bitcoin, you often find it difficult to understand the drastic price fluctuations in the market. To grasp these intense fluctuations, you will compare the performance of Bitcoin with traditional assets, such as stocks. This helps you see the big picture, and you quickly realize that although Bitcoin and the stock market often fluctuate in sync, their charts tell different stories. The comparison chart between Bitcoin and the stock market remains a key component of your Bitcoin investment strategy. In this guide, you will learn how to analyze and interpret this chart to make more informative and strategic investment decisions.
Is there a correlation between BTC price and the stock market?
When financial markets move in sync, they are considered to be correlated. For example, if the price of one asset rises or falls, and the price of another asset also moves in the same direction, they are positively correlated; if they move in opposite directions, they are negatively correlated; and if price movements are unrelated, they are independent.
Correlation is measured on a scale of -1 to +1:
As for Bitcoin, the correlation shows how its price fluctuations are related to other markets such as the stock market. As a new digital asset, the correlation between BTC and stock prices has changed—especially with the increase in its popularity and adoption.
BTC vs Stock Market: Independent Asset Classes
In the first few years after the birth of Bitcoin, it had almost no correlation with the S&P 500 index. It was not until 2012 that the price of BTC remained stable, while the S&P 500 index showed its usual steady rise (with minor declines). The first significant rise of BTC at the end of 2013 to early 2014 did not coincide with the simultaneous rise of the S&P 500 index.
The stock market fell at the end of 2016 while BTC prices rose. BTC prices fluctuated sharply, while the S&P 500 index changed relatively slowly. Until 2018, the price peaks and valleys of BTC and the S&P 500 still had almost no similarity.
BTC correlation with the stock market from the end of 2021 to 2023
From the end of 2021 to 2023, the price fluctuations of BTC are similar to those of stocks (although more volatile). The chart below shows the comparison between the price of BTC (Bitcoin) and the S&P 500 (SPX) and the Nasdaq Composite Index (ICIX) from November 2022 to November 2023.
The S&P 500 measures the performance of large-cap stocks, while the Nasdaq Composite Index tracks 2,500 market-cap weighted stocks. It can be seen that there is a certain synchronization between the two trends, but Bitcoin exhibits stronger volatility—especially after major events, indicating that traders and investors are starting to treat Bitcoin like stocks.
What does this mean for investors?
The correlation between the price of BTC and stocks may be a coincidence, or it may indicate that its price follows the trend of the stock market. What does this mean for investors?
As investors seem to treat BTC as stocks, digital assets may react to market factors like stocks. For example:
The price of Bitcoin fluctuates more significantly, but the market reaction is essentially the same. Overall, investors may temporarily treat BTC in a manner similar to stocks. BTC is still in the price discovery stage, and the market is determining the role it will play.
Interpretation of BTC and Stock Market Charts
Investors looking to profit from BTC price fluctuations first need to understand how to read price charts. Price charts visually display the historical price performance of assets over time. By closely observing the price movements of BTC and the Nasdaq Composite Index over the past four years, a more obvious correlation between the two can be identified.
Based on BTC and stock market charts, here are key correlation cases:
Analysis of the Causes of BTC's Correlation with the Stock Market
The correlation between BTC and the stock market is not driven by a single factor. According to the comparative chart analysis of BTC and the stock market, multiple factors collectively contribute to their similarity. Similar to the stock market, the price of BTC is deeply influenced by supply and demand dynamics and investor sentiment:
This interdependent mode of operation tends to synchronize the ups and downs of Bitcoin with the stock market. However, it is worth noting that certain factors may weaken this correlation.
The correlation between BTC and the stock market: evolving investment trends
Bitcoin is not subject to the same regulatory policies and government regulations as the stock market. For example, in 2021, the Chinese government's comprehensive ban on BTC mining affected the price of Bitcoin, but had no impact on the stock market. There are also technical differences - the stock market is not affected by data storage issues and power shortages, which directly impact BTC miners.
Why do charts still show a high degree of correlation recently?
The answer lies in the increasing correlation between Bitcoin and stocks. Despite not relying on the stock market operation, Bitcoin is no longer seen as an independent asset. Its popularity makes it highly similar to traditional stock holdings.
The correlation between BTC and the stock market continues to strengthen
BTC is no longer a niche asset traded by a small number of enthusiasts. Traditional brokerage firms and investment institutions are now involved. The same group of investors often invest in both BTC and stocks, and their portfolios may contain both of these assets at the same time.
The spillover effect of BTC returns is often reinvested in the stock market, and vice versa. As the correlation between BTC and the stock market continues to strengthen, investors are gradually realizing the similarities between the two and making more decisions based on the assumption that 'BTC is equivalent to stocks.' This close relationship leads to the mutual imitation of the fluctuation patterns of the two markets.
Pros and Cons of High Correlation
What does the correlation between Bitcoin and the S&P 500 index mean for ordinary investors? There are pros and cons to the correlation between Bitcoin and the stock market. If the correlation between Bitcoin and the stock market is strong, Bitcoin investments will become more predictable.
When BTC chart resembles the stock market, you can more easily notice market trends and make wise choices. In addition, since stock values tend to rise in the long run, the correlation between BTC and the stock market may mean greater long-term returns for BTC investors.
The Potential Benefits of BTC Decoupling from the Stock Market
While there are some benefits, you may not necessarily need to worry about BTC decoupling from the stock market, which could be good news for investors looking to diversify their portfolios.
Two different types of assets that fall asynchronously can better withstand financial storms. If decoupling occurs, investors will have more opportunities to hedge against the risk of a meltdown.
BTC - Stock Market Correlation: Impact on Investment Strategy
Whether the decoupling of BTC from the stock market is a "good thing" depends on your investment strategy. The high correlation between BTC and the stock market is advantageous for those who use stock market forecasts to formulate BTC trading strategies.
Investors with portfolios that are not sufficiently diversified may find that the correlation between Bitcoin and the stock market makes them more susceptible to market downturns.
Will Bitcoin follow the stock market?
In investing, it is important to avoid equating correlation with causation. Similarity in charts does not necessarily imply a direct impact between markets. The resemblance between BTC and stock market charts does not necessarily mean that one market will heavily influence the other. In some cases, the correlation between BTC and the stock market seems coincidental. For example, the stock market decline in March 2019 was due to increased aluminum tariffs, while the BTC decline in March 2019 was due to international pressure on BTC.
However, there is also a lot of evidence to suggest that the stock market may directly affect Bitcoin. Experts have noticed that regardless of other factors affecting the price, the price of Bitcoin often falls when the stock market opens. Investor confidence significantly affects the price of Bitcoin, so recent Bitcoin crashes often occur after stock market crashes. Bitcoin traders who start hearing news of a sluggish stock market often trigger conservative operations.
Will BTC decouple from the stock market?
If your investment strategy relies on the stock market's follow-up to BTC, you need to pay attention to signs of decoupling. Experts predict that this situation will not happen soon. As more and more people begin to confuse BTC and stock market charts, these two assets are more likely to influence each other. The slight correlation with the stock market seems likely to continue for the remainder of this year.
That being said, the decoupling of BTC from the stock market to a certain extent is inevitable. The main reason is that BTC's volatility is often greater. During sell-offs, BTC prices often plummet more severely than traditional stocks, and then rebound sharply.
Signs and uncertainties of BTC decoupling from the stock market
It's hard to say whether the decoupling of BTC from the stock market is positive or negative for BTC investors. Some people believe that BTC may stabilize when the stock market is falling, while others believe that even if the stock market recovers, the value of BTC may decline. In any case, signs of BTC decoupling from the stock market may include: