Do Bitcoin and Other Cryptocurrencies Profit from Bullish Equities Market Sentiment? Over the last decade, cryptocurrencies, led by Bitcoin, have emerged as a financially innovative technology that is causing waves. These digital assets function apart from the conventional monetary systems, utilizing decentralized control and ensuring the safety of all transactions. This enables a greater variety of use cases, including Joe Fortune’s cryptocurrency casino.
As the market for cryptocurrencies continues to develop, a question that emerges is as follows. Does the performance of cryptocurrencies, particularly Bitcoin, connect with the bullish feeling in traditional equity markets?
Between 2009 and the late 2010s, the disconnection of Bitcoin from the larger economy was both beneficial. Do Bitcoin and Other Cryptocurrencies Have harmful repercussions for the cryptocurrency? On the one hand, it functioned as a haven for investors who were looking for it. A class of assets that was immune to the volatility that so frequently impacted traditional stock markets.
And institutional investors have seemingly related to the values of equities and cryptocurrencies. The apparent similarity between the cryptocurrency market and the equity market can be better understood by gaining an understanding of the elements that influence both markets. Both markets eventually reached a mature state, which was one of the primary contributors to their dependence on one another. These are the following:
Demand and Supply
It is common knowledge that demand and supply affect the prices of goods and services. This idea applies not only to stocks and bonds but also to cryptocurrencies like Bitcoin. Thus, the combination of a shrinking supply of Bitcoins in the future and increasing demand is driving up the price of the cryptocurrency.
As a consequence of this, the same pattern is observed with regard to other cryptocurrencies, and investors are looking into the viability of these digital assets as investment prospects.
Prices of investments are subject to a significant amount of sway from the behaviour of the economy. Following the cycles that are inherent to it, the economy goes through periods of growth and decrease over time, and these changes are measured by the gross domestic product (GDP).
Nevertheless, significant occurrences can throw these cycles off balance and force the economy into a particular phase. For example, the COVID-19 pandemic that occurred in the year 2020 caused an economic slump, which in turn triggered a short recession and resulted in a significant drop in stock market prices.
Investors’ Expectations and Sentiments
The sentiment of investors is a significant factor that plays a role in determining prices in the financial landscape. It is a representation of the investors’ collective expectations regarding the future performance of the crypto and equity markets.
Due to this mentality, investors can be broken down into two distinct categories: those who anticipate price increases and those who anticipate price drops. As a consequence of this, their perspectives on the market influence the investing decisions that they make.
Do Bitcoin and Other Cryptocurrencies: Prices of cryptocurrencies and stocks are dramatically affected. When regulations are altered, one event that occurred in 2021 exemplifies this. This concept was perfect when the Chinese government put pressure on mining farm operators. To shut down their businesses and leave the market.
As a direct result of this, primary mining activities started relocating themselves around the end of May. As a consequence of these occurrences, the price of Bitcoin saw a steep decline. Falling from around $53,000 to $32,000 by the time the month of July came to a close. Eventually, in September, China implemented a ban on cryptocurrency that is currently in effect. Only after miners had finished moving to their new locations did the price of bitcoin start to rebound. Prices, on the other hand, did not return to their original levels until October.
Prices on the stock market and in cryptocurrencies are subject to significant influence from the interplay of political decisions made by different countries. This is due to the fact that prohibitions on commerce, as well as other forms of political action, can have a considerable impact on the availability of materials, labour forces, shipping, and other aspects.
As a direct consequence of this, investors in assets whose prices are influenced by political acts grow anxious about the possibility of price instability or volatility. They make decisions on investments based on their views and perceptions and then buy or sell assets in accordance with those decisions.
Equities and Crypto Price Correlation
Prior to the pandemic, cryptocurrencies such as Bitcoin and Ether had a modest connection with major stock indices, which gave the impression that these assets may be used as possible risk diversifiers and hedges against swings in other asset classes.
Nevertheless, this scenario had a significant impact on the unusual responses of the central banks to the crisis. In early 2020, as a result of loosening global financial conditions and increased investor willingness to take risks. The values of cryptocurrencies and US stocks skyrocketed, which led to a closer association between the two asset classes. The correlation coefficient between Bitcoin returns and the S&P 500. The most crucial stock index in the United States was only 0.01 between 2017 and 2019. Bitcoin returns did not reveal a directional solid link with the S&P 500.
However, this changed over the 2020-2021 time period as both assets moved more in sync with one another. Rising or falling simultaneously, and the correlation coefficient increased to 0.36. This enhanced association between cryptocurrencies and stocks is also evident in developing market economies, many of which have been at the forefront of the adoption of crypto-assets. Several of these economies have seen a significant increase in the value of cryptocurrencies over the past year.
As an illustration, over the year 2020-2021, the correlation between the returns on the MSCI emerging markets index and Bitcoin stood at 0.34. When compared to the numbers from the prior years, this is a significant 17-fold increase.
So What Does It Mean for Investors?
The similarity between the values of cryptocurrencies and equity prices may be just a coincidence. Still, it might also be an indication that cryptocurrencies are tracking movements in the equity market. This indicates that Bitcoin and other cryptocurrencies are now benefiting from a bullish attitude in the equity market, which is essential information for investors to understand.
Investors in cryptocurrencies, on the other hand, could be exposed to losses in the event that the equities market suffers a decline, provided that the correlation between the two markets holds. In the end, investors should approach investments in cryptocurrencies with caution because of the unpredictability that surrounds the behaviour of future markets. It isn’t easy to make accurate forecasts about how the market and pricing will behave in the future. Therefore, before making decisions concerning cryptocurrency investments. Investors should exercise caution and do a thorough risk assessment of the opportunities and downsides that may arise.