The rise and fall of the crypto market are dependent on the stock market. If you don’t believe it, you can check the correlation between the two industries and their price action this year (2020). For example, during the first week of March, both the stock market and the crypto market were hit quite badly after coronavirus hit countries all around the globe.
However, both markets have recovered quite steadily since then. And when the stock market is down a little bit again recently, the crypto market is also down a little bit from $10,000 to $9,000. How and why are they correlated? You might want to study more about Bitcoin before you continue with this article. Click this link to learn the basics of Bitcoin.
The Stock Market And The Reality
The stock market was doing so well before the end of February 2020 where coronavirus was projected to hit countries all around the world. It crashed in early March but then it made a slow comeback since then. Nobody knows if the current comeback is just a “dead cat bounce” or a real slow comeback. After all, the US has started reopening its economy, and many people have been re-employed.
That being said, many economists have clearly stated that the current situation is still very uncertain. Epidemiologists also said that we hadn’t reached any peak yet, and the economy might get much slower again when the worst situation finally arrives to our world with the pandemic.
And the real question is, in that “what if” scenario, would the stock market go down again? After all, the stock market was getting better from mid-March to June, while many people face more uncertainty regarding their financial situation during the same time period.
The Correlation With Cryptocurrencies
Many crypto traders fail to see the correlation between Dow and the crypto market even though it’s quite easy to see it. If you have a TradingView account, you might want to use it more often. As you can see from the chart comparison between DOW and BTC/USDT above, both the crypto and stock market were down quite heavily in the beginning of March but both of them also recovered from mid-March.
Obviously, there’s a huge difference between the two. Bitcoin has been much more volatile compared to DOW and its recovery (post the early March crash) has been much better as well. But, once again, in the longer-term trend, BTC often goes up when DOW also goes up. This has not always been the case, though. Back in 2018 and 2019, DOW and BTC could move independently out of each other, as proven by the chart below:
So, yeah, what was previously uncorrelated is now more correlated than ever. Unlike this chart from Q4 2019 (where DOW was going steady and BTC was going down), 2020 has been a year where the two often had the same price action trends.
What Does It Mean?
Why is 2020 the year where the crypto and stock market move together? Well, it looks like both of them suffer from liquidity problem. Yes, when the COVID-19 became serious and hit countries from all over the world, many wealthier people started to hoard cash. They dumped their stock investments, their crypto investments, and others, just to stock up on US Dollars.
Both the stock and crypto markets suffer from this liquidity issue and the prices crash. But when the Fed injected “unlimited amount of US Dollars” into bonds, the market became optimistic again. While there’s no certainty what the future holds for both the stock and crypto market, it’s undeniable to see that liquidity and fiat involvement still play a very big part in the crypto space.
While in the long term, it’s quite possible for crypto to move independently once again (and not follow stock market’s price action), it might take awhile before we actually get to that point again. Not until we have successfully beat this pandemic.
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