Is the Bitcoin price independent of the stock market?
Bitcoin was created as a decentralized currency that can operate independently of the stock market. But is the Bitcoin price really independent of major indices like the SMI, Dow Jones, S&P 500, or NASDAQ? We explore this question to find out whether Bitcoin and other cryptocurrencies might serve as a hedge in the event of a stock market crash.
Do you remember the 2008 financial crisis? At that time, many people lost trust in the traditional banking system as the stock market crashed and a banking crisis ensued. In response, Bitcoin was launched in 2009 as an independent alternative to the stock market. Many investors saw investing in Bitcoin as an opportunity to protect themselves from the turbulence of the stock markets and manage their investments independently, without intermediaries. From that point on, many people began to engage with the economy themselves and exchange ideas via platforms such as Google Finance, Twitter, or Reddit.
Over time, however, a relationship began to develop between Bitcoin prices and stock markets. It can be observed that the Bitcoin price fluctuates when stock indices like the ATX do so first. Let’s take a look at why this is the case. To do so, let’s briefly examine the main differences between the stock market and Bitcoin:
Stocks are ownership shares in a company. When you buy stocks, you become a part-owner of the company and benefit from its success. Bitcoin, on the other hand, is not backed by any asset. Its value is determined by supply and demand.
The stock market is regulated by government authorities, whereas Bitcoin is decentralized and not controlled by any central entity.
The costs of trading stocks on the stock exchange are relatively high. Transaction fees for cryptocurrencies are usually lower.
Access to stock markets is controlled and time-restricted. Cryptocurrencies are accessible to everyone, everywhere, and at any time.
Especially in times of economic uncertainty, stock markets fluctuate significantly. Investors are more likely to consider buying gold. Have you perhaps heard the term "digital gold"? Bitcoin is often referred to as digital gold because, like gold, it has limited availability. The supply of the rare metal gold is finite, and similarly, Bitcoin has a cap of 21 million coins that will ever enter circulation. Thus, both gold and Bitcoin can serve as hedges against inflation. When the money supply increases, the market price of a limited asset tends to rise.
Moreover, gold has proven its value stability over long periods of time. Bitcoin and cryptocurrencies, however, are still considered risky assets, and the Bitcoin price behaves accordingly. Interestingly, Bitcoin has clearly outperformed gold in terms of returns over the past ten years, from 2011 to 2021. By the end of 2021, Bitcoin had risen by 70%, while gold had declined by 7%.
Is Bitcoin really so independent of the stock markets? For a long time, it seemed that way when looking at the price of Bitcoin compared to the S&P 500 index, which tracks the 500 largest American companies. However, in recent years, Bitcoin has started to mirror the movements of the S&P 500. In 2018, for example, inflation and interest rate fears caused the stock market to drop. In 2020, it was the COVID-19 pandemic. During these major downturns, the price of Bitcoin also fell.
Bitcoin and the stock market therefore seem to be linked, partly because they are exposed to similar influences. On one hand, there is the general economic situation and market uncertainty: economic instability, recession, high inflation, or geopolitical events increase concerns about the future. This fear can impact traditional financial systems, causing stock prices to fall. The opposite is true during periods of positive sentiment.
The fact that stock market crashes often lead to Bitcoin crashes is related to investor confidence. When crypto traders hear about a downturn in the stock market, they tend to act conservatively and sell, which drives the Bitcoin price down.
Cryptocurrencies are a technological innovation and interact primarily with tech stocks. Since the growth of stocks like Google, Amazon, Microsoft, and others has somewhat slowed, investors see the next growth sector in cryptocurrencies such as Bitcoin. The more institutional investors invest in Bitcoin and other cryptocurrencies, the higher their value rises. Regulations, such as investor protection or oversight by authorities like the FMA, can also promote acceptance. And the greater their adoption and value increase, the higher the chance that cryptocurrencies will once again perform more independently of the stock market.
Bitcoin is increasingly being viewed by both small investors and large traditional institutions as an alternative asset class. It is seen as a decentralized, digital asset with limited availability and high volatility. Bitcoin can be used to diversify one’s investment portfolio. Diversification means spreading wealth across different asset classes to minimize risk and achieve higher returns.
Bitcoin serves, much like gold, as a hedge during economic turbulence. Stocks, on the other hand, are designed as long-term investments with relatively slow value changes. Bitcoin, however, is highly volatile, meaning it can quickly gain or lose value.
Today, in uncertain economic times with high inflation, the traditional financial market is under pressure. Bitcoin can act as a store of value and has the potential to increase in value as acceptance and adoption of cryptocurrencies grow. In such a scenario, it could decouple further from the stock market and serve as a safe haven asset.
The trend is moving in the right direction. The popularity and trading volume of Bitcoin have been increasing for years. Interestingly, compared to stocks or gold, it still only represents a small percentage of the trading volume, even though its value increase over the past few years has significantly outperformed other investment instruments.
Of course, there are no guarantees for further growth of Bitcoin in the future. However, it seems that there is still a lot of potential for cryptocurrencies like Bitcoin.
This article constitutes neither investment advice nor a solicitation to buy or sell crypto-assets or other financial instruments or to enter into any other financial transactions. The primary purpose of this article is to provide general information. No representations or warranties, express or implied, are made regarding the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. Therefore, it is not advisable to rely on the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. Some statements in this article may contain forward-looking expectations based on our current assessments and assumptions. These statements are subject to uncertainties and may cause actual results, performance, or events to differ from the statements made in this article.
Cryptonow and all persons advising or representing it cannot be held liable in any way for this article. It is important to note that investments in crypto-assets carry both risks and opportunities.
