After the reflection of January’s bitcoin fall in the stock market’s Dow Jones and S&P 500, it has been found that there has been an increased amount of correlation between the cryptocurrency and stock market. This has led the stock market investors to follow the crypto sentiments.
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Increased correlation between cryptocurrency and stock market
Last month, when bitcoin fall down below $6,250, the Dow Jones of wall street experienced a similar downfall by losing 1,175 points which were the biggest one-day point loss. Similarly, S&P 500 experienced its first 10% decline in two years. Now, it has been revealed that there is a correlation between the cryptocurrency and stock market.
Recently, as cryptocurrencies fall down considerably again, the stock market followed the suit by losing big points.
According to the DataTrek Research, the correlation has reached 30 percent which is the highest level that is ever seen. As the cryptocurrency market is growing, it has now the potential to affect the stocks like Nvidia.
In addition, an interrelation can also be seen recently as the prices of Square stocks experienced a bullish trend in the light of bitcoin trading addition announcement. Being highly volatile, the crypto market can be used as an early indicator of changes in the risks that are reflected in the comparatively slower stock market.
Same direction, different speed
During the last year, crypots increased in prices considerably along with its market cap that reached its all-time high at $800 billion. Similarly, the global market cap of stock added trillions experiencing a bullish trend.
Stocks and cryptocurrencies moved in the same direction up to the starting of this year, though the digital currencies rose faster. As the cryptocurrencies moved to a downward slope in January, stocks followed the suit but at a slower speed.
The direction for both looks similar if we do not consider the speed of the rise and fall. One of the reasons for same is cryptos are now taken as an alternative to stocks, especially because of ICOs. Moreover, investors of both the industry are high-risk takers.
As for gold, that had an inverse relationship with bitcoin before, no longer seems to have much correlation with cryptocurrencies.
Stocks investors uses crypto trend as barometer
This correlation between the stock and cryptocurrency market has resulted in the stock market investors to pay attention to the trend of the crypto market to determine the stock trend.
As stated by the chief investment officer at Forester Capital Management:
“We do view bitcoin as a sentiment indicator.”
Another chief investment officer of the Minneapolis money manager Leuthold Group, Doug Ramsey commented:
“We’ve begun to watch bitcoin more closely as a sign of speculative enthusiasm.”
The relationship is certainly there but how long will it last can only be determined over the time. Moreover, it also remains to be seen if the sentiments in stocks will reflect the sentiments in cryptocurrency market.
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