|Factors that affect prices|
|DELIVERIES ONLY||DELIVERIES ONLY|
|Investor sentiment||Investor sentiment|
|Economic conditions||Economic conditions|
|Monetary Policy||Monetary Policy|
|Regulatory changes||Regulatory changes|
|The financial health of the issuer of the shares||Developmental changes|
Supply and demand
It is fairly well known that supply and demand significantly affect the prices of products and services. These influences also affect the share price; they seem to affect bitcoin as well. Only 21 million bitcoins will ever be created – future supply shrinks while demand grows, driving up their price. Other cryptocurrencies are following suit as investors seek them out for investment opportunities.
Moods and expectations of investors
One of the most significant factors to do with prices is investor sentiment. In the stock market, investor sentiment is investors’ expectations of the market. In this regard, they are grouped into two segments – those who believe that prices will rise; and those who believe prices will fall. They then base their investment decisions on their outlook.
How the economy behaves has a significant effect on investment prices. The economy, as measured by gross domestic product, rises and falls over time. It has natural cycles that it follows, but macro events can force it into certain parts of the cycle. For example, the 2020 Covid-19 pandemic caused an economic downturn that resulted in a brief recession and a drop in stock market prices.
Changes in monetary policy, such as a fall in the interest rate, can cause investments such as bonds to produce lower returns, reducing investor interest – they feel they can get better returns elsewhere. In addition, monetary policy measures taken to combat the effects of inflation can slow down economic growth, which in turn affects stock and cryptocurrency prices.
Political decisions between different countries affect the stock market and cryptocurrency prices, as trade restrictions or other political actions can affect the supply of materials, labor, transportation, and more. As a result, those who invest in assets affected by political actions fear price instability or volatility and buy or sell based on their convictions.
Regulatory changes affect cryptocurrency and stock prices. For example, in 2021, the Chinese government pressured mining farm operators to shut down and leave. Large mining operations began moving in late May. In June, Sichuan province imposed measures that declared them illegal. The price of bitcoin fell from around $53,000 to $32,000 by the end of July, and China effectively banned cryptocurrencies in September. The price of Bitcoin recovered after the relocation of miners, but it was not until October that prices returned to previous levels.
Cryptocurrencies at their most basic level are data. They are managed by software created and maintained by developers. Problems with software development or disagreements between developers can worry investors. For example, when Bitcoin Cash appeared after the Bitcoin hard-fork in July 2017, investors reacted and the price of Bitcoin fell by almost $600.
Cryptocurrency prices vs. stock prices
Interest in Bitcoin and cryptocurrencies as an investment asset class emerged sometime in late 2016, as evidenced by the slow and steady increase in prices throughout that year until 2017, when the price of Bitcoin exceeded $1,000. The media picked up on the phenomenon and prices peaked at nearly $17,000 over the course of the year before settling down to between $3,000 and $10,000. The 2020 Covid-19 pandemic caused significant concern for investors who panicked as businesses and economies slowed and shut down.
Many investors fled the stock market and put their assets into Bitcoin during the pandemic, which quadrupled in price by 2021, then fell, hovering around $30,000 until May 2022, when its price began to decline, falling below $30 for the first time since June 2021 000 USD.
During the pandemic, the S&P 500 — the stock index most used by investors to measure the market — lost more than 110 points as investors shifted their assets to alternative investments. The U.S. economy languished in a brief recession, then began a recovery, with stock prices climbing to more than double their end-of-recession value.
As the index and the economy recovered to pre-pandemic levels, investors were convinced that bitcoin was a new asset class that could be used to generate returns in the toughest market conditions. Many corporations have already started sinking money into cryptocurrency, and Bitcoin’s performance during the pandemic has boosted their positions and prospects. Bitcoin made its investment debut and attracted a large number of retail investors, institutions and businesses.
Bitcoin, which was traded like an early adopter stock on cryptocurrency exchanges for several years, has been treated like a stock by traders and investors – cementing its position as an asset class.
Cryptocurrency price correlation
As Bitcoin turned into an asset class, more interest arose. Brokers and institutions gained traction with regulators and offered investment opportunities such as bitcoin-linked ETFs and 401(k)s that allowed investors to put bitcoins into them. As institutions provided familiar tools, investors seemed to be more comfortable with cryptocurrencies.
In late 2021 and mid-2022, cryptocurrency prices rose and fell much like stock prices. The chart below shows the price of Bitcoin (BTC) compared to the S&P 500 (SPX) and the Nasdaq 100 (NDX).
It is important to note that the graphs overlap each other in order to compare returns over a given time period.
The SPX is a measure of the performance of large-cap stocks. The NDX measures the performance of the 100 largest publicly traded non-financial companies; most of them deal with technology. The chart shows the price history of SPX, NDX and BTC from November 2021 to May 2022. You can see how the prices of each rise and fall relative to each other – although Bitcoin shows much more volatility – indicating that Bitcoin is perceived and treated very similarly as with shares. by traders and investors.
It appears that the cryptocurrency price correlation that has emerged is not that Bitcoin is in any way related to stocks, but that investors and traders are inadvertently creating a correlation. They trade Bitcoin the only way they know how – the same way they trade the asset classes they know most.
What does this mean for investors?
The correlation of cryptocurrency price with equity could be a coincidence or indicate that cryptocurrency prices actually follow stock price trends. So what does this mean for investors?
It is possible that since investors seem to treat cryptocurrencies like stocks, digital assets may respond to market forces in the same way that stocks do. For example, on May 4, 2022, the Federal Reserve announced that it was raising its federal funds target range to 0.75%-1%. On May 5, 2022, Bitcoin fell to around $31,000. The NDX lost about 1,400 points and the SPX lost about 150 points. The price of the cryptocurrency was much more pronounced, but the effect was the same.
It is also likely that investors as a whole treat cryptocurrencies the way they temporarily treat stocks. Cryptocurrencies are still in the price discovery phase where the market determines the role they will play. When they were first introduced, investors paid them no attention.
Once it was discovered that you could buy bitcoin, hold it, and then sell it for more, investors became interested. There was no market experience with digital assets, so prices fluctuated wildly as the market began to experiment and speculate.
This means that investors should approach cryptocurrency with caution. It is hard to say how the market and prices will behave in the future. Bitcoin and other cryptocurrencies may or may not remain correlated with stocks. If you are interested in investing in cryptocurrencies, it is best to speak with a professional financial advisor who is familiar with them. They can help you determine what is best for your financial situation and investment goals.
Is the crypto market related to the stock market?
There appears to be crypto investment and trading activity that mimics the stock market based on price data.
Are BTC and ETH Correlated?
According to Tradingview, BTC and ETH appear to be correlated, indicating that the cryptocurrencies have generally traded similarly to each other.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICO”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the author to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decision. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.