Increased and growing awareness from retail and institutional investors since 2017 created market movements that, at first appearance, seem to suggest that cryptocurrency and equities markets are correlated. However, it isn't so much a correlation as it is an indication of how cryptocurrency is being treated by the market that gives it this appearance.

From 2009 to the mid-2010s, the broader economy's lack of cryptocurrency awareness and understanding was apparent in the low prices and trading volumes of the times. During that period, it acted as a way for investors to speculate on an emerging financial technology. As awareness grew, prices rose, and investors became more interested. Treating cryptocurrency the only way they know how, as an investment or speculative opportunity, prices began to rise and fall dramatically based on investor sentiments, economic circumstances, regulator actions, and all other factors that affect traditional investments.

What 🧸Factors Affect Stock and Cryptocurrency Prices?

Investors have long preferred the equity market. As a result, the factors that affect stock market prices and performance have been extensively studie𒀰d.

The table below lists some factors that affect stock prices. Beca�💖�use cryptocurrencies are treated the same as stocks, bonds, and commodities, these factors also affect their prices.

It's important to note that cryptocurrencies can be issued by companies to raise funding. These security tokens would likely be treated much more like stocks than speculative cryptocurrencies because their value would be associated with how the company is evaluated. A cryptocurrency that is not issued as a secu🍸rity token doesn't have any value as𓆏sociated with it except for what speculators are willing to pay for it.

Supply and Demand

It's fairly well known that 澳洲幸运5官方开奖结果体彩网:supply and demand significantly affect the prices of products and services. These influences also affect the price of equities; it appears that they also affect Bitcoin and other cryptocurrencies. For example, there will only ever be 21 million Bitcoin created—the future supply of new coins is dwindling while demand increases. The relationship between the two tends to influence the prices of many investments, products, and services over time, so it appears t🍰hat b𝔉ecause Bitcoin is treated like commodities, property, and investments, it also responds to these pressures.

Investor Sentiments and Expectations

One of the most significant factors that have to do with prices is investor sentiment. In the equities market, 澳洲幸运5官方开奖结果体彩网:investor sentiment is the expectation investors have for a market. In this regard, they are grouped into two segments—those who believe prices will increase💎 and those who believe prices will decrease. They then base their investing decisions on their outlo🎐ok.

Cryptocurrencies more popular with investors tend to follow these conditions as well, although at an intensified rate. Bitcoin is the prime example here—based on its massive gains since it was introduced, many investors expect more from it. This is evident in many instances—for instance, a media employee 澳洲幸运5官方开奖结果体彩网:accidentally announced that the Securities and Exchange Commission had approved a Spot Bitcoin Exchange Traded Fund in October 2023. The SEC had not approved one, but Bitcoin's price rose nearly $2,000 in a matter of hours after the announcement, then dropped back to its previous level shor꧋tly after that. Investor expectati༺ons (and hopes) fueled this rapid rise and fall.

Bitcoin halving events, which occur roughly every four years, have tended to influence price increases also. This is commonly associated with investor expectations and sentiments about the issue of dwindling supply. Fewer coins are issued as a reward after halvings, so expectations change, as do prices investors are willing to pay. Sometime in mid-April 2024, Bitcoin will undergo its fourth halving, cutting the block reward from 6.25 to 3.125. If the past is any indicator (past performance does not indicate fܫuture results, of course), the crypto might experience a price increase overall. However, it's just as likely prices will drop overall or not change much.

Economic Conditions

How the economy is behaving has a significant impact on investment prices. The economy, measured by changes in gross domestic product (output), increases and decreases over time. It has 澳洲幸运5官方开奖结果体彩网:natural cycles it follows, but macro events can force it into specific portions of the cycle. For example, the COVID-19 pandemic in 2020 caused an economic downturn that resulted in a short recession and plummeting stock market prices.

Monetary Policy

澳洲幸运5官方开奖结果体彩网:Monetary policy changes such as an interest rate decrease can cause investments like bonds to produce fewer yields, decr🐼easing investor interest—they feel they can get better returns elsewhere. Additionally, monetary policy measures taken to fight the effects of inflation can slow economic growth, in turn affecting stock and cryptocurrency prices.

Geopolitics

澳洲幸运5官方开奖结果体彩网:Political decisions between different countries influence the stock market and cryptocurrency prices because trade restrictions or other political actions can affect the supply of materials, labor forces, shipping, and more. As a result, those who invest in assets affected by political actions fear price instability or volatility and buy or sell according to theꦺir beliefs.

Regulation

Regulatory changes influence cryptocurrency and stock prices. For example, in 2021, the Chinese government pressured mining farm operators to shut down and leave. Large mining operations began moving in late May. In June, Sichuan Province introduced measures that declared them illegal. Bitcoin's price dropped from about $53,000 to $32,000 by the end of July, and China effectively banned cryptocurrency in September. Bitcoin's price recovered after miners relocated, but it wasn't until October that prices reached previous levels.

On Jan. 11, 2024, the first Bitcoin Spot ETPs were approved by the Securities and Exchange Commission. The few Bitcoin-related products that had been approved in years previous experienced huge capital outflows in the following weeks as Bitcoin investors suddenly had more options. Bitcoin's price began another steep climb from a closing price on Jan. 10, 2024, of about $50,000 to more than $75,000 on an exchange called Exmo in Poland (March 14, 2024).

Developmental Issues

Cryptocurrencies, at their most fundamental level, are data. They are managed by software created and maintained by developers. Development issues with the software or disagreements between developers can cause concern for investors. For example, when Bitcoin Cash emerged after a hard fork from Bitcoin in July 2017, investors reacted, and Bitcoin's price dropped by nearly $600.

Cryptocurrency Prices vs. Stock Prices

Interest in Bitcoin and cryptocurrencies as an investment asset class emerged sometime around late 2016, as witnessed by the slow, steady price increases through that year into 2017 when Bitcoin's price crossed $1,000. Media outlets covered the phenomenon, and prices climbed throughout the year to peak at nearly $17,000 before settling down to fluctuate between $3,000 and $10,000. The COVID-19 pandemic in 2020 created a 澳洲幸运5官方开奖结果体彩网:significant worry f♔or investors, who panicked because businesses and economies were slowing and shutting down.

During the pandemic, the S&P 500—the stock index used most by investors to gauge the market—lost more than 110 points as investors transferred their assets to alternative investments. The U.S. economy floundered into a short recession, then began a recovery in which stock ﷽prices climbed to more than double their value by its end.

By the time the index and economy had recovered to pre-pandemic levels, investors were convinced that Bitcoin was a new asset class that could be used to realize returns under some of the most austere market conditions. Many corporations had already begun to sink money into cryptocurrency, and Bitcoin's performance during the pandemic reinforced their positions and outlooks. Bitcoin had made its investing debut, attracting a large following of retail investors, institutions, and enterprises.

Bitcoin, which had been traded like a stock for several years on cryptocurrency exchanges by early adopter🌼s, began to be treated like a stock by traders and investors—solidifying its position as an asset class.

Crypto Price Correlation

As Bitcoin morphed into an asset class, more interest was created. Brokerages and institutions gained traction with regulators and offered investment opportunities like Bitcoin-linked ETFs. Beca🅰use ♐institutions were providing familiar instruments, investors appeared to become more comfortable with cryptocurrencies.

From late 2021 into 2022 and through 2023, cryptocurrency prices rose and fell similarly to equity prices (albeit with much more volatility). The chart below shows Bitcoin's (BTC) price compared to the S&P 500 (SPX) and the Nasdaq Composite (ICIX) from November 2022 to November 2023.

SPX is a measurement of the performa🌌nce of large-cap stocks. ICIX measures the performance of 2,500 capitalization-weighted stocks on Nasdaq. You can see trends somewhat rising and falling with each other—although Bitcoin demonstrates mu𓂃ch more volatility, especially after significant events—suggesting that Bitcoin is viewed and treated very much like a stock by traders and investors.

The cryptocurrency price correlation that has emerged appears not to be that Bitcoin is related to equities in any way but instead that investors and traders are inadvertently creating a correlation. They are tradin🅠g Bitcoin the only way they know how—the same way the asset classes they are most familiar with are traded.

What Does It Mean for Investors?

Cryptocurrency's price correlation with equity could be a coincidence or indicate that cryptocurrency prices are indeed following trends in equity prices. So, what does this mean for investors?

It is possible that because investors appear to be treating cryptocurrency like stocks, digital assets can react to market influencers just like equities do. For example, on May 4, 2022, the Federal Reserve announced that it was increasing its target federal funds range to 0.75%–1%. On May 5, 2022, Bitcoin fell to around $31,000. The Nasdaq 100 (NDX) lost about 1,400 points, and SPX lost about 150 points. The cryptocurrency pri▨ce was much more pronounced, but the effec🐻t was the same.

It is also likely that investors, as a whole, are treating cryptocurrency the way they treat equities temporarily. Cryptocurrencies are still in their price discovery phase, where the market♏ is determining the role they will play. When they were first introduced, investors paid t✤hem no attention.

What this means is that investors should approach cryptocurrency cautiously. It is difficult to tell how the market and prices will act in the future. Bitcoin and other cryptocurrencies could remain correlated to equities, or they might not. If you're interested in investing in cryptocurrencies, it's best to talk to a professional financial advisor familiar with them. They can help you determine what is best for your financial circumstances and investing goals.

The Botton Line

Bitcoin has come a longജ way from its meager beginnings as a payment method. Regulatory and classification debates between regulators, fans, and investors continue—but the cryptocurrency keeps demonstrating it is an investment asset, a currency, and a novelty all at the same time. Its price loosely correlates to stock market prices, likely because traders and investors treat it the same way they would any other asset—as a way to store value, protect capital, generate income from small trades, speculate on price actions, and more. The longer it survives in the market, the more investors will use it in their strategies.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our for more info. As of the date this article was written, the author owns BTC and LTC.