The cryptocurrency market can be volatile. It’s not hard to see that it is susceptible to many variables. These include foreign exchange rates fluctuations, Decentralized Finance (DeFi), monetary policy, regional regulation or Fear, Uncertainty and Doubt (Fear, Uncertainty and Doubt).

But crypto pundits continue to try and determine whether there’s a direct link between traditional stock markets, and cryptocurrencies. Bitcoin-USD, for example, has been a great investment opportunity over the years and witnessed a huge influx from institutional as well as retail investors. 

Although billions have been deposited in crypto markets, it is still possible that BTC and any other cryptocurrency could be used as an investment haven, much like gold or U.S. Treasury bonds when there’s a global equity market sell-off. There are mixed views on whether the cryptocurrency market is related to the stock markets. Diverse opinions are expressed by industry professionals. While some emphasize the link, others insist that more research is necessary to make a clear conclusion. 

While the notion that Bitcoin could be considered digital gold or a hedge against inflation is a popular idea, financial professionals are not unanimous. For now, Bitcoin can be classified as an asset that doesn’t exhibit a strong long-term relationship with gold and the bond market. With more financial institutions joining the market, we may see stronger correlations, at least in the longer term.

Opposing Opinions

According to Ben Caselin, Head of and Research and Strategy at AAX, “Although the inflation hedge thesis is strong for Bitcoin, overall the crypto markets have become increasingly tied to the stock market, especially under current macro conditions. It is possible that Bitcoin may be moving away from the 4-year-old cycle. The stock market might see a temporarily higher correlation due to this. However, at the core, crypto markets live a life of their own and I would say that their aggregate growth potential far exceeds anything found in traditional markets today.”

Some experts think that cryptos may perform similarly to more volatile industry entry in equity markets like dotcom stocks from the ’90s. These stocks included speculative web stocks. Blockforce Capital, an American asset manager, has shown that Bitcoin and cryptocurrencies behaved independently in their early stages. There was no correlation between BTC’s price and the, from January 2015 to October 2018.

Citing a different view, Tae Oh, Gluwa Founder and CEO, suggests that the crypto-to-stock link is more rotational in nature and indicative of an inverse relationship, adding, “When the market expects a bounce-back, it will pull capital from crypto to top up its stocks. If the withdrawal seems like a long-term trend, crypto will benefit.”

In another contrast, according to VanEck data published in early 2021, there was no discernible correlation between bitcoin prices and those of other major markets, such as the S&P 500, bonds, gold, real estate, and others, for the period between 2013 to 2019. Since the start of 2020 however, there has been a significant positive correlation between bitcoin prices and stock markets. This suggests that they are related to directional momentum. 

If we look at the performance data for 2020, when markets collapsed at the outset of the COVID-19 pandemic, Bitcoin’s correlation with stock markets took a different turn, following which the interrelation between these two asset classes became deeper. DataTrek Research’s report indicated that the relationship between cryptocurrency and traditional stock markets is stronger when sentiment is considered, instead of core technical indicators. DBS from Singapore highlights the growing correlation between Bitcoins and stock markets in 2021.

To this extent, JD (NASDAQ:) Gagnon, Co-Founder of BENQI, notes, “A pullback in the stock market will most likely have short-term implications on the prices of overall crypto markets. Bitcoin is a store of value that can be used as an alternative. The flow of capital into bitcoin and eventually the crypto markets would not be an impossibility as DeFi offers better yields compared to traditional markets.”

Conclusion

While Bitcoin’s correlation with the S&P 500 and is still relatively low, the fact that Bitcoin and other cryptocurrencies haven’t been around during major economic catastrophes makes it complicated for analysts to derive absolute conclusions.

As a rather young asset class, only time will tell if the playing field transforms cryptocurrencies into a safe-haven investment like gold, bonds, and treasuries to hedge against economic turmoil, or if it will directly reflect the stock market’s price momentum.

Disclosure: Reuben Jackson didn’t hold any positions in the securities listed in this article at the time it was published.

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