Source: Bitcoin Magazine Pro Team
Compiled by: BitpushNews
When investing in Bitcoin, you often struggle to understand the market's wild price swings. To make sense of these wild swings, you compare Bitcoin's performance to traditional assets like stocks. This helps you see the big picture, and you quickly discover that while Bitcoin and the stock market often move in tandem, their charts tell different stories. A Bitcoin vs. Stock Market chart remains a key component of your Bitcoin investment strategy. In this guide, you'll learn how to analyze and interpret this chart to make more informed and strategic investment decisions.
Is there a correlation between Bitcoin prices and the stock market?
Financial markets are said to be correlated when they move in sync. For example, if the price of one asset rises or falls and another asset moves in the same direction, they are positively correlated; if they move in opposite directions, they are negatively correlated; and if the price movements are unrelated, they are independent.
Correlation is measured on a scale from -1 to +1:
- +1 means the assets move in perfect sync
- -1 means a completely opposite swing
- 0 means price fluctuations are independent of each other
In the case of Bitcoin, correlation shows how its price movements are linked to other markets, such as the stock market. As an emerging digital asset, Bitcoin’s correlation with stock prices has changed—especially as its popularity and adoption have increased.
Bitcoin vs. the Stock Market: A Standalone Asset Class
In the first few years of Bitcoin’s existence, there was little correlation between Bitcoin and the S&P 500. Until 2012, Bitcoin prices remained stable while the S&P 500 exhibited its usual steady rise (with minor dips). Bitcoin’s first major rise in late 2013 and early 2014 was not accompanied by a simultaneous rise in the S&P 500.
The stock market decline in late 2016 coincided with a rise in Bitcoin prices. Bitcoin prices fluctuated wildly, while the S&P 500 moved relatively flat. As of 2018, Bitcoin and the S&P 500 had very little similarity in their peaks and troughs.
Bitcoin and stock market correlation from late 2021 to 2023
From late 2021 through 2022 and into 2023, Bitcoin prices have risen and fallen in a similar way to stock prices (albeit with greater volatility). The chart below shows the price of Bitcoin (BTC) versus the S&P 500 (SPX) and Nasdaq Composite (ICIX) from November 2022 to November 2023.
The S&P 500 measures the performance of large-cap stocks, while the Nasdaq Composite Index tracks the Nasdaq 2,500 market-cap-weighted stocks. It can be seen that there is a certain synchronization between the two trends, but Bitcoin shows stronger volatility - especially after major events, which shows that traders and investors are beginning to treat Bitcoin like stocks.
What does this mean for investors?
The correlation between Bitcoin prices and stocks could be a coincidence, or it could indicate that its price follows stock market trends. What does this tell us about investors?
Since investors appear to view Bitcoin similarly to stocks, the digital asset may react to market influences like stocks. For example:
- May 4, 2022: The Federal Reserve announced that it would raise the federal funds target rate range to 0.75%-1%
- May 5, 2022: Bitcoin falls to around $31,000, the Nasdaq 100 (NDX) falls by around 1,400 points, and the S&P 500 falls by around 150 points
Bitcoin price volatility is more significant, but the market reaction is essentially the same. Overall, investors may treat Bitcoin the same way as stocks for the time being. BTC is still in the price discovery phase, and the market is determining the role it will play.
Interpreting Bitcoin and Stock Market Charts
Investors who want to profit from Bitcoin price fluctuations must first understand how to read a price chart. Price charts provide a visual representation of an asset’s historical price performance over time. A closer look at the price of Bitcoin and the Nasdaq Composite Index over the past four years shows that the correlation between the two is even more pronounced.
Based on the Bitcoin and stock market charts, here are some key correlation examples:
- December 2018: Bitcoin and Nasdaq prices both hit historic lows ($3,689 vs 6,192 points)
- June 2019: Both experience sudden and sharp price spikes
- February 2020: A sharp decline after a quarterly high
- March 2021: Prices surge to unusually high levels
- October 2021: After maintaining a high level for several months, it fell synchronously and did not recover during the year
- November 2021: Correlation has increased significantly, with Bitcoin almost completely following the Nasdaq
- May 2022: Bitcoin began to mirror Nasdaq’s small fluctuations after a sharp decline and a slight recovery
An analysis of the causes of the correlation between Bitcoin and the stock market
The correlation between Bitcoin and the stock market is not driven by a single factor. According to the comparison chart of Bitcoin and the stock market, multiple factors have contributed to the similarities between the two. Similar to the stock market, the price of Bitcoin is deeply affected by supply and demand and investor sentiment:
- Reasons for the increase: When market demand is strong, market prospects are optimistic, and supply is limited, the prices of both tend to rise simultaneously.
- Reasons for decline: When investors worry about the future economic trend or encounter unfavorable policies, prices usually fall collectively
This pattern of mutual growth and decline makes the rise and fall rhythm of Bitcoin and the stock market tend to be consistent. However, it is worth noting that certain factors may weaken this correlation.
Bitcoin and Stock Market Correlation: An Evolving Investment Trend
Bitcoin is not subject to the same regulatory policies and government regulations as the stock market. For example, the Chinese government's blanket ban on Bitcoin mining in 2021 affected the price of Bitcoin but had no impact on the stock market. The differences also exist on a technical level - the stock market is not affected by data storage issues and power shortages, which directly affect Bitcoin miners.
Why do recent charts still show a high correlation?
The answer lies in the increasing interconnectedness of Bitcoin and stocks. Although Bitcoin does not rely on the stock market to operate, it is no longer considered an independent asset. Its popularity has made it highly similar to traditional stock holdings.
The correlation between Bitcoin and the stock market continues to grow
BTC is no longer a niche asset traded by a few enthusiasts. Traditional brokerage firms and investment institutions are now involved. The same investors often invest in both Bitcoin and stocks, and their portfolios may contain both assets.
The spillover effect of Bitcoin's earnings is often reinvested in the stock market, and vice versa. As the correlation between Bitcoin and the stock market continues to increase, investors gradually realize the similarities between the two and make more decisions based on the assumption that "Bitcoin is equivalent to stocks." This close correlation causes the volatility patterns of the two markets to mimic each other.
Pros and Cons of High Correlation
What does the correlation between Bitcoin and the S&P 500 mean for the average investor? There are pros and cons to Bitcoin's correlation with the stock market. If Bitcoin and the stock market were highly correlated, Bitcoin investing would become more predictable.
When Bitcoin and the stock market chart resemble each other, you can more easily notice market trends and make informed choices. Additionally, since stock values always rise in the long run, Bitcoin's correlation with the stock market could mean greater long-term gains for BTC investors.
Potential benefits of Bitcoin decoupling from the stock market
While there are some benefits, you don’t necessarily need to worry about Bitcoin decoupling from the stock market, which could be good news for investors looking to diversify their portfolios.
A portfolio of two assets that fall out of sync can better withstand financial storms. If decoupling occurs, investors will have more opportunities to hedge against the risk of a crash.
Bitcoin-Stock Market Correlation: Implications for Investment Strategies
Whether or not Bitcoin’s decoupling from the stock market is a “good thing” depends on your investment strategy. Bitcoin’s high correlation with the stock market is beneficial for those who use stock market forecasts to develop a Bitcoin trading strategy.
Investors whose portfolios are not yet sufficiently diversified may find that Bitcoin’s correlation with the stock market makes them more vulnerable to market downturns.
Will Bitcoin follow the stock market?
Avoid equating correlation with causation in investing. Chart similarities do not necessarily mean there is a direct impact between markets. Just because Bitcoin and stock market charts look so similar does not necessarily mean that one market greatly affects the other. In some cases, Bitcoin's correlation with the stock market appears to be coincidental. For example, the stock market fell in March 2019 due to an increase in aluminum tariffs, while the Bitcoin fall in March 2019 was due to an international crackdown on Bitcoin.
However, there is also a lot of evidence that the stock market can directly affect Bitcoin. Experts have noticed that Bitcoin prices tend to fall when the stock market opens, regardless of other factors that influence the price. Investor confidence heavily influences Bitcoin prices, so recent Bitcoin crashes tend to occur after stock market crashes. Bitcoin traders who start hearing news of a stock market downturn tend to trigger their conservative moves.
Will Bitcoin Decouple from the Stock Market?
If your investment strategy relies on Bitcoin following the stock market, watch for signs of decoupling. Experts predict that this won’t happen anytime soon. As more people start to conflate Bitcoin and stock market charts, the two assets are more likely to influence each other. The slight correlation with the stock market seems likely to continue for the rest of the year.
That being said, some degree of decoupling between Bitcoin and the stock market is inevitable. The main reason is that Bitcoin tends to be more volatile. In a sell-off, Bitcoin prices tend to plummet more than traditional stocks, and then recover sharply.
Signs and uncertainty of Bitcoin’s decoupling from the stock market
It is difficult to say whether Bitcoin’s decoupling from the stock market is a positive or negative for Bitcoin investors. Some believe that Bitcoin may stabilize when the stock market falls; others believe that Bitcoin’s value may decline even if the stock market recovers. In any case, signs of Bitcoin’s decoupling from the stock market may include:
- Governments step up regulation of Bitcoin
- Losing faith in Bitcoin and decentralized finance
- Increase in token withdrawals
- Stock prices continue to fall
