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Crypto vs. Stocks

Cryptocurrencies and stocks have been in the news for quite some time. Everyone wonders if cryptocurrencies and stocks can coexist in the future. Can cryptocurrency prices decouple from stock prices?

These are difficult questions to answer due to a lack of knowledge about cryptocurrencies and their future. However, some similarities between the two markets can give a glimpse of what might happen in the future.

What is a decoupled market?

A decoupled market is an economic system that does not depend on stock market performance. The decoupled market coexists with the stock market but does not rely on the performance of the latter to function. This could be considered a form of economic independence.

What is the correlation between crypto and the stock market?

There is a close relationship between the price of Bitcoin (BTC) and the value of stocks, especially the value of technology stocks. On a daily timescale, the correlation between Bitcoin, the leading cryptocurrency by market capitalization, and the S&P 500, which has a strong technology component, had reached a value of 0.69.

BTC and SPX Correlation Chart

The correlation value is calculated using a method that takes into account changes in the index and the price of the cryptocurrency over time. In general, correlations greater than 0.5 are considered very high and those greater than 0.7 are considered extremely strong. On the other hand, those between -0.3 and 0.3 are considered low.

A score of 1 implies perfect synchronization, while -1 represents complete opposition.

The release of Consumer Price Index data has had an impact on cryptocurrency and stock markets. The rate of consumer price inflation in the United States has slowed in recent months. It remained close to a four-decade high, however.

However, the release of US CPI numbers triggered a dramatic sell-off in the stock market, and the crypto market followed suit.

CPI Report and Its Impact on Stocks and Crypto

The most recent Consumer Price Index report showed continued rapid growth and less stabilization than experts had predicted. Contrary to expectations, the consumer price index (CPI) rose 8.3% in August, indicating that the pressure on consumption remains severe.

The report proved to Federal Reserve officials that more aggressive action may be needed to lower interest rates. As a result, the Fed raised interest rates to slow the economy and manage recent high inflation.

In addition, the Fed closely monitors the underlying inflation rate. Excluding food and fuel, consumer prices rose 6.3% in the year to last month, up from 5.9% in July and more than the 6.1% forecast by experts. Even when inflation is taken into account, the details of the report raise concerns.

Stock market reaction to CPI report

The stock market suffered due to market dissatisfaction with the CPI report. Stocks fell as August inflation data came in higher than expected, dampening investor hopes of lower prices and a less militant Federal Reserve.

The Dow Jones Industrial Average fell 1,629 points, or 4.99%, to 31,025. The S&P 500 fell 4.77% to 3,932.69, while the Nasdaq Composite fell 6.75% at 12,050.57.

NASDAQ, SPX and DJIA price drop on CPI

Tech companies were particularly hard hit, with semiconductor giant Nvidia dropping 9.5% and Facebook parent company Meta dropping 9.4%.

Crypto Market Reaction to CPI Report

It turns out that the rate of inflation in the United States has not slowed as much as experts had expected. Therefore, the future may be more challenging for risky cryptocurrency assets.

Following the CPI announcement, the cost of risky assets fell, with the price of bitcoin dropping from $22,700 to around $21,000.

Bitcoin and Ethereum price drop on CPI

Ether, the native currency of the Ethereum blockchain, rose from $1,760 to $1,594, indicating that macro trends have overtaken the positive narrative around the blockchain merger.

Will crypto prices ever be able to decouple from stocks?

This might break up in the future, but it doesn’t seem to be happening right now. But, as we have seen, the correlation between stocks and cryptos is very positive, which is why stocks and cryptos move in the same direction.

Additionally, we saw how both market segments reacted to this week’s US CPI numbers. Stocks and cryptocurrencies fell sharply, but cryptos seemed to be more sensitive to fundamentals than stock markets.

As a result, we saw a 12% drop in Bitcoin and Ethereum, while stock indices fell 4% to 7%.

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