Bitcoin ($BTC) has been moving in the opposite direction of the United States Dollar (USD) since the beginning of 2022. Presently, the inverse relationship is more extreme than ever.
The Dollar And Bitcoin Goes In Opposite Directions
Visibly, we could see that USD has been surging since August 2021. Bitcoin did have one final rally into new ATHs in early November where the Dollar Index did dip slightly before plunging to today’s price of sub USD $20,000.
Similarly, stock market indexes have fallen sharply too amidst a risk-off environment where investors flock towards safer assets and choose to keep their money in cash rather than equities or crypto. This inverse correlation is evident in the performance of DXY, equities and crypto market in the past year.
There are times where USD and Bitcoin shared a positive correlation as we can see in the chart below. Throughout much of 2021, the Greenback and Bitcoin were trading in synergy.
Bitcoin And The Stock Market
In late 2021 and into mid-2022, cryptocurrency prices rose and fell similarly to equity prices. The chart below shows Bitcoin’s (BTC) price compared to the S&P 500 (SPX) and the Nasdaq 100 (NDX).
SPX is a measurement of the performance of large-cap stocks while NDX measures the performance of 100 of the largest non-financial companies listed on the exchange where most of them are involved in technology.
The graph shows SPX, NDX, and BTC price history from November 2021 to May 2022. You can see prices of each rising and falling identically, albeit Bitcoin demonstrating much more volatility, 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. Crypto and equity belong to the same risk-on asset class.
What Does It Mean For Investors?
Cryptocurrency’s price correlation with equity could be a coincidence or indication 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 tech stocks, digital assets can react to market influencers just like equities do.
Example: On the 4th of May, the Federal Reserve announced that it was increasing its target Federal Funds Rate range to 0.75%–1%. On the 5th of May, Bitcoin fell to a low of USD $35,500. NDX lost about 1,400 points, and SPX lost about 150 points. The cryptocurrency price was much more pronounced, but the effect 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 them no attention. Once the word was out that you could purchase crypto, hold it, then sell it for more, investors naturally became interested. There was no market experience with digital assets, so prices fluctuated wildly as the market began experimenting and speculating.
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. Cryptocurrency is still the new kid on the block and may just continue to remain correlated to equities, or rather tech stocks to be more precise.
It is important to monitor DXY and the equities market when analyzing crypto. Crypto does not move by itself and is susceptible to the macro decisions made.
It is best to look outside of the crypto market to gain an insight of how the financial system moves in tandem to make a more informed investment decision.
This way, you can be assured of your investments and not have to worry about seeing a 10% decline in the market because you have done your research.
[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]
Featured Image Credit: Chain Debrief