Supply and Demand

It’s fairly well known that come up with and demand significantly affect the prices of products and services. These influences also affect the price of equities; it enter into the pictures that they also affect Bitcoin. There will only ever be 21 million Bitcoin designed—the future supply is dwindling while demand increases, which raises its price. Other cryptocurrencies follow uniform as investors explore them for investment opportunities.

Investor Sentiments and Expectations

One of the most significant factors that be suffering with to do with prices is investor sentiment. In the equities market, investor sentiment is the expectation investors have for the market. In this consideration, they are grouped into two segments—those who believe prices will increase; and those who believe prices discretion decrease. They then base their investing decisions on their outlook.

Economic Conditions

How the economy is conducting has a significant impact on investment prices. The economy, measured by gross domestic product, increases and decreases over adjust. It has natural cycles it follows, but macro events can force it into specific portions of the cycle. For example, the COVID-19 pandemic in 2020 caused an fiscal downturn that resulted in a short recession and plummeting stock market prices.

Monetary Policy

Monetary strategy changes such as an interest rate decrease can cause investments like bonds to produce fewer yields, de-escalating investor interest—they feel they can get better returns elsewhere. Additionally, monetary policy measures bewitched to fight the effects of inflation can slow economic growth, in turn affecting stock and cryptocurrency prices.

Geopolitics

Governmental decisions between different countries influence the stock market and cryptocurrency prices because trade restrictions or other governmental actions can affect the supply of materials, labor forces, shipping, and more. As a result, those who invest in assets pompous by political actions fear price instability or volatility and buy or sell according to their beliefs.

Regulation

Regulatory mutations influence cryptocurrency and stock prices. For example, in 2021 the Chinese government was pressuring mining farm operators to cut off down and leave. Large mining operations began moving in late May. In June, Sichuan Province introduced rules that declared them illegal. Bitcoin’s price dropped from about $53,000 to $32,000 by the end of July, and China effectively barred cryptocurrency in September. Bitcoin’s price recovered after miners relocated, but it wasn’t until October that assesses reached previous levels.

Developmental Issues

Cryptocurrencies, at their most fundamental level, are data. They are watch overed by software created and maintained by developers. Development issues with the software or disagreements between developers can cause distress for investors. For example, when Bitcoin Cash emerged after a hard-fork from Bitcoin in July 2017, investors reacted, and Bitcoin’s figure dropped nearly $600.

Cryptocurrency Prices vs. Stock Prices

Interest in Bitcoin and cryptocurrencies as an investment asset class emerged later around late 2016, as witnessed by the slow, steady price increases through that year into 2017 when Bitcoin’s cost out crossed $1,000. Media outlets covered the phenomenon, and prices climbed throughout the year to peak at nearly $17,000 preceding the time when settling down to fluctuate between $3,000 and $10,000. The COVID-19 pandemic in 2020 created a significant worry for investors, who feared because businesses and economies were slowing and shutting down.

During the pandemic, the S&P 500—the stock index used most by investors to gauge the market—obsolete more than 110 points as investors transferred their assets to alternative investments. The U.S. economy floundered into a knee-pants recession, then began a recovery in which stock prices climbed to more than double their value at the end of the dip.

By the time the index and economy had recovered to pre-pandemic levels, investors were convinced that Bitcoin was a new asset order that could be used to realize returns under some of the most austere market conditions. Many corporations had already begun to settle money into cryptocurrency, and Bitcoin’s performance during the pandemic reinforced their positions and outlooks. Bitcoin had walk away its investing debut and attracted a large following of retail investors, institutions, and enterprises.

Bitcoin, which had been swopped like a stock for several years on cryptocurrency exchanges by early adopters, began to be treated like a stock by distributors and investors—solidifying its position as an asset class.

Crypto Price Correlation

As Bitcoin morphed into an asset domain, more interest was created. Brokerages and institutions gained traction with regulators and offered investment opportunities breed Bitcoin-linked ETFs and 401(k)s that allowed investors to place Bitcoin in them. Because institutions were accord familiar instruments, investors appeared to become more comfortable with cryptocurrencies.

In late 2021 and into mid-2022, cryptocurrency values rose and fell similarly to equity prices. The chart below shows Bitcoin’s (BTC) price compared to the S&P 500 (SPX) and the Nasdaq 100 (NDX).

It’s noted to note that the graphs overlay each other for a comparison of returns over the time period.

SPX is a dimension of the performance of large-cap stocks. NDX measures the performance of 100 of the largest non-financial companies listed on the exchange; most of them are labyrinthine associated with in technology. The graph shows SPX, NDX, and BTC price history from November 2021 to May 2022. You can see prices of each rising and ruin with each other—although Bitcoin demonstrates much more volatility—suggesting that Bitcoin is viewed and handling of very much like a stock by traders and investors.

The cryptocurrency price correlation that has emerged appears not to be that Bitcoin is correlated to equities in any way but instead that investors and traders are inadvertently creating a correlation. They are trading Bitcoin the only way they comprehend how—the same way the asset classes they are most familiar with are traded.

What Does It Mean for Investors?

Cryptocurrency’s payment correlation with equity could be a coincidence or indicate that cryptocurrency prices are indeed following trends in neutrality prices. So, what does this mean for investors?

It is possible that because investors appear to be treating cryptocurrency relish stocks, digital assets can react to market influencers just like equities do. For example, on May 4, 2022, the Federal Reticence announced that it was increasing its target federal funds range to 0.75%–1%. On May 5, 2022, Bitcoin fell to around $31,000. NDX lost here 1,400 points, and SPX lost about 150 points. The cryptocurrency price was much more pronounced, but the effect was the regardless.

It is also likely that investors, as a whole, are treating cryptocurrency the way they treat equities temporarily. Cryptocurrencies are even so in their price discovery phase, where the market is determining the role they will play. When they were head introduced, investors paid them no attention.

Once it was noticed that you could purchase a bitcoin, hold it, then transfer it for more, investors became interested. There was no market experience with digital assets, so prices fluctuated wildly as the hawk began experimenting and speculating.

What this means is that investors should approach cryptocurrency cautiously. It is troubling to tell how the market and prices will act in the future. Bitcoin and other cryptocurrencies could remain correlated to equities, or they strength not. If you’re interested in investing in cryptocurrencies, it’s best to talk to a professional financial advisor familiar with them. They can avoid you determine what is best for your financial circumstances and investing goals.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and theoretical, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s circumstances is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or promises as to the accuracy or timeliness of the information contained herein.