When you view CoinMarketCap for the first time, you will see charts of cryptocurrency valuations that look exactly like stock market charts. For that matter, all investment asset classes are charted and tracked in the same way. But while pointing out similarities in descriptions and comparisons between cryptocurrency and the stock market, most writers never address whether cryptocurrency and stock markets are price-correlated.
Before 2021, cryptocurrency markets moved independent of stock markets. Beginning in mid-2021, both markets began moving in tandem. Analysts now note that cryptocurrency, particularly bitcoin, behaves more like a risky tech stock than in the past.
We will contrast the two in detail later, but let’s clear the air on their broad connections first.
What Are the Connections Between Stocks and Crypto?
Just because they are uncorrelated doesn’t mean they’re not connected in any way. Both are products available for purchase and sale in the financial industry after all; economic products don’t exist in a vacuum. Thus, news in the stock market influences crypto traders, just as crypto news has an ever-growing effect on stock traders. Before we dive too deep here, it’s helpful to learn what stocks and cryptocurrency actually are first, because it is sort of like comparing apples and oranges.
The Stock Market
The term “stock market” describes all of the trading of stocks (pieces of ownership of a company) around the world on an ongoing basis. There are actually multiple physical places where stocks are exchanged around the world, with the main ones located in:
- New York City
- London
- Tokyo
- Shanghai
- Hong Kong
- Europe
People, either physically or more commonly online, go to these exchanges to trade shares of publicly owned companies.
In case this has you confused: the terms “stock” and “share” really just mean the same thing. “Stock” is a more general term referring to ownership pieces of any company. “Share” is used more when talking about pieces of a specific company. For instance, I’d be concerned about stocks falling this week, so I might sell my three shares of Tesla if short-term trading is the focus.
Cryptocurrency: What Is It, and How Did It Get Started?
Cryptocurrency, on the other hand, is not a piece of a physical company, or any company for that matter. Crypto is simply digital money not devised or regulated by any government.
Bitcoin is the original and by far the current most popular cryptocurrency. Although there is plenty of debate over whether he actually exists, Satoshi Nakamoto developed Bitcoin in 2009. He knew, however, that this new currency would have no value if it was easy to make up, so he developed a complicated system of digital mining. Bitcoin mining is a time and resource intensive activity, and the software protocol specifies a finite amount of bitcoin, 21 million coins. That helps it retains value. A record of all bitcoin transactions is kept in a blockchain, essentially a digital ledger.
The system worked and over the years the value has gone up to the point where exchanging fiat, or government backed money, for bitcoin became extremely expensive. The Bitcoin network protocol allows for fractional spending of smaller units, the smallest one being called a Satoshi (worth 0.00000001 Bitcoin).
Bitcoin and crypto in general are not backed by any government. Inherently it will always be subject to less regulation than fiat, meaning that it can be very volatile at times. In general the value has increased. But in 2018, it crashed. Despite this, bitcoin still has increasingly become an accepted form of payment for many merchants, both online and brick and mortar.
The success of bitcoin indirectly led to differences in opinion of how developer should progress, causing a split in the development community. This was never resolved, and two sides found themselves at a stalemate. Consequently, this lead to the development of Bitcoin Cash in a process called a fork, which works the same way but uses a new blockchain from the split block on. Interest in blockchain and cryptocurrencies also resulted in creation of numerous similar or unrelated cryptos like:
- Dogecoin
- Ethereum
- Ripple XRP
- litecoin
- 0x
- Monero
The Effect of Legitimacy: Wall Street Took Notice
With the crypto market fully coming into its own and the development of its own trading platforms like Coinbase, stock market traders and those fascinated by crypto’s fluctuations began to day trade in it. That is how crypto trading picked up a reputation for being like the wild west of trading.
One of the main results of crypto’s rise to fame, particularly that of bitcoin, was Wall Street’s treatment of it like gold. Gold is assigned valuable based on its history, utility and finite amount of gold in circulation.
Sound familiar? Wall Street began to realize that they have more options. When the stock market starts to take a nosedive, traders often stash their money in the safety of gold. Now, they can also use Bitcoin. Therefore, today’s traders also utilize Bitcoin as a safe haven when stock market times get tough.
The Shared Language of Cryptocurrency and the Stock Market
Crypto and stock traders share the same language. That is, they have the same vocabulary and use some of the same techniques. Let’s run through a few of them first to see:
- What they mean
- How they work
- Their connections to both crypto and the stock market
Day Trading
Plenty of people buy shares of a company for various reasons. Maybe you believe in its potential and want to get in on the ground floor. Or after holding on a few assets for a long time, you decide to sell a few shares of Apple or Microsoft to buy yourself something nice.
Yeah, that’s not day trading. In day trading, your whole job, day in and day out, is trading. You do not particularly care about buying Walmart the company, for example, but you care a lot about the price fluctuations of Walmart stock for the next couple of weeks. Buy low, sell high, and try to make a profit. If paying close attention to the markets is your profession, you can do it. It’s important to mention here that most day traders fail. Successes are rare.
Wall Street speculation and day trading is pretty well-known. People sit in skyscrapers in New York City, day after day, buying and selling stocks. They use industry knowledge and algorithmic computer trading to try and turn a profit. Well now that crypto has increased in value it can be traded on reliable platforms like Coinbase Pro, Gemini and Kraken. As a result day trading has started.
Day trading in crypto is a little different. If you are like me and do not really have the patience for the typically slow daily movement of the stock market, you will like crypto. Values of crypto bounce around constantly. If you are good at riding that wave, you can make money a lot of faster. And many crypto algorithms have been developed for sale to traders as crypto trading bots. Some let you tweak the parameters, some are fixed. Some are open sourced, some code is guarded and kept secret from buyers.
This lack of transparency is one major limit of crypto trading systems and bots. And they don’t have a long history of success to back up any claims or justify their use at this point, in my opinion.
Volatility
Therein lies the risk with crypto though: it’s extremely volatile since it’s not backed in physical goods or regulation. Volatility simply refers to how much the value of something is at risk of fluctuating. Most stocks have less volatility than crypto because they are much more regulated and tied to a physical value.
The US Dollar, for example, has very low risk and is not at all volatile. It’s tied to a strong, regulated government whose economy the world trusts. But inflation erodes its value every year, and critics point to the government’s ability to print money whenever the economy needs a jumpstart, increasing national debt by billions per year. The recent $2 trillion coronavirus stimulus package is an example of how quickly cash can be artificially created. Some think this move is a good long-term sign for bitcoin as an investment.
Market Trades
Market trades are when you buy or sell either stock, crypto, or anything else for that matter at market value. In stocks, you are selling your shares right now at their current market value or buying them at their current price. In crypto, you are exchanging at the current rate for fiat, or using fiat to buy crypto at that rate. Odds are if you are not a day trader and just want to sell some shares of Google, or a couple Bitcoins, to buy a car, you’re happy to make a market sale and take the cash.
Limit Trades
Another technique shared by stock and crypto traders alike is the limit trade. This is a practice done almost exclusively by day traders. But shrewd long-term investors can use them to open and close positions as well, saving a little money by letting crypto volatility work for them.
In a limit sale, you can set limits on how low or high you want your stock or crypto to go in value before a sale occurs. When your Bitcoin reaches $8,000 each, for instance, a sale is triggered to cut your losses and walk away. Or, you could decide to set a limit sale for $10,000 each, when you feel as though you have made enough profit. The choice is yours. Day traders will set up limit sales so they do not have to constantly monitor the health of their crypto; they can just set it and go on to actively analyze something else. The same is done by day traders on Wall Street every day.
In that case, limit buys work the way you would expect; when a crypto or stock comes down to a predetermined value, a purchase is triggered. If you do not want to keep waiting for it to get cheap enough, you can set the limit buy and go do something else.
Due to crypto’s significantly higher volatility, limit trades are crucial for safety. Imagine buying a Bitcoin during the 2017 highs for $19,000. Then suddenly, in 2018, you hear about the crash and log in to find out it is now only worth $3,000. Devastation. If you had set a Stop Limit order to sell for $12,000, you would have cut your losses; your Bitcoin would have been automatically sold off at your bottom acceptable rate before risking any significant damage to your portfolio.
These strategies did not start with crypto, of course. They are techniques taken directly from stock market trading.
Does Crypto Follow the Stock Market?
Pre-2021, the markets were not correlated. Beginning in mid-2021, bitcoin prices began mimicking high-tech stock moments. Trading in crypto operates completely within its own marketplace. Imagine there are two countries next to each other that speak the same language:
- They communicate.
- They engage in economic activity together.
- There is probably some sort of historical bond connecting their two cultures, making them more similar than they are different.
- They have similar governments and their social values are mostly the same.
- A lot of people hold dual citizenships and families are on both sides of the border.
- Their laws are similar
- However, they have two separate, sovereign governments. One country in no way has control over the other.
That is the essence of the relationship between cryptocurrency and the stock market; their relationship is just like those two countries. To put it in those same terms:
- Cryptocurrency market success may or may not happen if the stock market is in the tank. Crypto investors hope that the two markets completely uncouple at some point.
- Their economic activity is not mutually exclusive. Stock traders will store money in Bitcoin, and the overall success of companies that decide to accept crypto could benefit with increased sales from doing so.
- They both essentially work in the same way, and traders make similar considerations when it comes to buying and selling. Crypto is just a lot more volatile.
- Most stock traders at this point, particularly young ones, have dabbled in crypto. And crypto traders definitely know a thing or two about stock trading.
- The techniques of the good traders are the same, but just a little more conservative in crypto.
- The regulations for both stock and crypto trading internationally are becoming pretty similar. Crypto is the new kid on the block though, so governments are still trying to catch up.
- That being said, the stock market and crypto market are completely separate entities. You cannot find Bitcoin on Vanguard, and you can’t buy Amazon stock on Coinbase. You can buy the Grayscale Bitcoin Trust (GBTC) in a brokerage account, along with other coins and tokens in various trusts. ETF’s will most likely be approved in the near future.
One small but noteworthy difference between the two, before we go on: since crypto is not tied directly to the stock market, it is not beholden to its Mon-Fri 9:30 am to 4:00 pm EST schedule. You can trade crypto any time you want.
How Did the March 2020 Stock Market Crash Affect Crypto Long Term?
Bitcoin arose out of a recession that was already raging in 2009. In fact, the bank crisis of that period directly led to bitcoin’s creation. There was nowhere to go but up for price at that point. The most reasonable expectation was that a stock market crash probably would lead to a sell-off of crypto. As much as investors like to treat crypto like gold, if things get really bad, they would probably prefer to stick with the gold.
But after an initial drop in bitcoin and other large cap crypto prices in mid-March, prices are trended back up at a faster pace than the stock price recovery. In addition, crypto prices actually dropped less during the coronavirus situation stock sell off. And the Federal Reserve pumping $2 trillion new dollars into the economy raised some concerns for those who watch the national debt closely.
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Does Crypto Affect the Stock Market?
When hardly anybody even knew what bitcoin was, that answer was pretty much a resounding no. But now it can, thanks to its:
- Large marketplace ecosystem and its volatility
- Increasing interconnections within the economy
- Availability for use as a safe haven
We have already covered the safe haven stuff, but let’s go over those other two points a bit more.
Size and Volatility
When Bitcoin was just this small idea back in 2009 and nobody had really heard of blockchain, it had about as much effect on the stock market as little Jane’s lemonade stand on the corner. But as you can see, there are now scores of crypto traded on Coinbase and other exchanges online. With their increased value, the performance of crypto day traders invariably affects the stock market.
Think about it this way: If there is a huge crypto crash like we saw in 2018 and a trader loses just about everything, how inclined will he or she be to go buy a few shares in the stock market. Or conversely, if a crypto trader makes a ton of money in Dogecoin next week and decides to sell a few (or, technically, exchange a few for fiat) he or she would probably consider investing in stocks. This is especially true with the values of crypto extending into the thousands of dollars.
But although the numbers are bigger, unfortunately, volatility has not really gone down. When we were talking about Jane’s Lemonade Stand numbers, a bitcoin crash was not really a big deal. Years later it is a big deal. The bigger the size of the cryptocurrency economy, the more affect it has on everything else. Think about how the car manufacturers going under in 2008 threatened to wreck the whole economy.
Crypto’s Increased Influence
In what ways does crypto affect the overall economy? Not too much yet for the undervalued, smaller ones. But putting its effect on stock market trends aside, Bitcoin in particular is increasingly being trusted as a legitimate currency and not just as a store of value. Which is great because, after all, that was the whole point (not for us to day trade it all the time). Here are some ways, as of 2020, you can use Bitcoin:
- Microsoft– You can add Bitcoin to your Microsoft account to buy
- Windows 10 licenses
- Other software programs
- Movies
- Apps
- Xbox games and subscriptions
- Overstock– You can buy things at this online retailer with Bitcoin and even
- Ethereum
- Bitcoin Cash
- Monero
- Dash
- Litecoin
- Reeds Jewelers– Bitcoin is the premier cryptocurrency, so why not use it buy premier jewelry from this well-known US-based based jeweler.
- More Stamps Global– Popular travel booking website that accepts many different cryptocurrencies as payment besides fiat.
- Physical retailers– Even some physical retailers are starting to accept crypto, though not any of the large chains
If you have crypto, you might decide to use it to buy things at these places. Offering additional forms of payment increases the likelihood that customers will buy things from a retailer. The more sales a retailer makes, the more profit they make. The more profit they make, the better their stocks do. In that way, crypto also affects the stock market.
However, the constant fluctuations in crypto value means that, sadly, buying with them doesn’t usually make a whole lot of sense. In March 2020, one Bitcoin was worth $8,500. A few months earlier, it sat just under $6K. In 2021, bitcoin price peaked at near $68K, its all-time high at the time of this post revision.
Indices
In stocks, rating indices like the Dow Jones Industrial Average or the S&P 500 are used to summarize the overall health of the stock market and make predictions on how it will change. You’ve probably heard sentences on the news like, “The Dow fell 500 points today on news of the political upheaval in the UK,” or “The S&P 500 rose 2.5% this morning after interest rates were cut.”
If you are concerned about the overall health and outlook of your 401k, you will have a vested interest in these numbers. These funds are made up of a collection of stocks and bonds in “safer” economic sectors. If you are a day trader, index news very well determines your attitude on buying and selling that day.
With the large increase in the number of cryptocurrencies available, the crypto market needed a way to evaluate its overall health. So, it turned to the stock market and got the idea to get its own indices.
Crypto10 Index
The Crypto 10 Index is like the Dow Jones Industrial Average of crypto. Created by BITA, Crypto10 monitors the performance of the ten largest cryptocurrencies on the market:
- Bitcoin
- Ethereum
- XRP
- Bitcoin cash
- Tether
- Litecoin
- EOS
- Binance Coin
- Bitcoin SV
- Stellar
In a market where volatility is a huge factor, having an index like Crypto10 to gage the sector’s health is crucial to determining whether to buy or sell. What is even more convenient: Crypto10 is calculated in US dollars on a daily basis.
Cryptocurrency Index Funds
Just like your 401k, there are a lot of different funds that buy into a collection of stocks within the stock market. Some of these are called index funds because they simply buy into the 500 companies that make up the S&P 500 Index. Then it is easy to tell how your fund is doing: just check the S&P number. This also makes the fund pretty safe and reliable for the long term.
Such a concept is a welcome adaptation into the crypto marketplace. Why buy into just Bitcoin, with its drastic volatility, when you can spread your money around into a large collection of cryptos? Don’t put all your eggs in one basket, as the saying goes. Crypto index funds have therefore made buying into crypto a lot less precarious of a proposition.
As of April 2020, investors are still awaiting the approval of the first cryptocurrency ETF. Many have tried, but none have passed the approval process. Most feel that it’s just a matter of time.
Grayscale Investment Trusts
Right now, stock market investors and anyone with a brokerage account can buy the Grayscale Crypto trusts just as if the were a stock or ETF. The Grayscale Bitcoin Fund trades under GBTC, and the Ethereum fund under ETHE. Disclosure: I have positions in both of those and also their Crypto Large Cap fund, which trades under GDLCF.
They are easy to buy, but be sure to study their prospectus on the Grayscale site to understand how much each share holds. For example, the GBTC fund holds 0.009 bitcoin per share. But it trades at a price higher than what that amount would cost bought directly on an exchange. This is called a premium.
These trusts trade at a premium becasue they are a convenient way for investors to own bitcoin in a retirement plan or qualified tax-deferred account. In additions, people who may still be wary of crypto exchanges use these trusts instead.
Just remember, that premium could drop quickly, causing a loss of money even if the underlying crypto is stable or rising slightly. And if the underlying crypto asset price drops, the funds could drop even faster. Of course, the opposite also happens. When Ethereum began its early 2020 price rise, ETHE rose much quicker, the premium expanding along with price rising.
Grayscale Large Cap Crypto Fund
While the world awaits approval of its first bitcoin or any other crypto ETF, investors can still trade individual cryptocurrency in the Grayscale Funds. In addition to each specific crypto available, they offer a Digital Large Cap Fund for those who don’t want to or are unstable to choose one specific cryptocurrency. Here is the breakdown of the fund:
| Currency held per share | Asset |
| 0.00048299 | Bitcoin |
| 0.00279224 | Ethereum |
| 0.00048599 | Bitcoin Cash |
| 0.00157821 | Litecoin |
| 1.11886265 | XRP |
The fund is a market cap weighted fund, and the holdings are rebalanced quarterly. It is currency available to retail investors in traditional brokerage accounts. Coinbase opened its own index fund in 2018 and then promptly shut it down, leaving Grayscale as the only competitor in this particular crypto niche. That explains why their funds often trade at a premium to the true underlying value of the currencies held.
BB Index
BB Index actually contains 26 different index funds with a lot of different cryptos. They primarily deal with Olympus Labs, which is sort of its own separate crypto marketplace though. So, unfortunately, you will not find the main crypto players here. And who knows about their volatility. But if you want to just try out a large fund of various cryptos and know a thing or two about this sector, give this playground a try.
Cryptos Fund
Cryptos Fund operates in the standard crypto domain, like the Grayscale Funds, but it tracks with the top 30 cryptos. It gives you a lot of variety that way, not to mention the management fee is only 0.99%. A cheap way into a much larger variety is good, but that also exposes you to more risk. You are going to have to do a lot more work to track the overall health of the fund. But if you are truly serious about crypto trading and especially day trading, that is all part of the fun.
Despite all of this, bitcoin remains the standard by which the cryptocurrency markets are judged. Most investors have never heard of the other 2,000 cryptocurrencies, and it’s likely to stay that way. Most of them won’t survive long enough to be more than a blip on the market’s radar. Many have already failed. The few that survive will do so because of adoption or genuine needs for their utility.
