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How Is Crypto Correlated To Natural Indices, The Stock Market, And Inflation

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In the past few years, an interesting correlation between cryptocurrency and the stock market has been observed. Over the years, Bitcoin has closely followed the stock market, which performs well when the country’s economy is stable, and tanks when the economy begins to stutter.

However, clarifying the stock market is of importance if its correlation with the cryptocurrency market is to be understood.

Correlation Between The Stocks And Cryptocurrency Markets

Stock involves ownership of a piece or ‘share’ of an already existing company. At the beginning of any company, the founder owns a large amount of the shares or stock. But as time goes on and more investors come on board, the founder can sell a piece of their shares. As the company grows, the value of these shares increases, and the reverse happens when the company experiences setbacks.

The stock market involves trading these companies’ stocks or shares, while the crypto market is more in line with trading cryptocurrencies such as bitcoin and Ethereum.

Before the covid-19 pandemic in 2020, the crypto market showed little correlation with the stock market. Investors used these two options to diversify their portfolios and avoid the aftereffects of market crashes. But this changed after the central bank crisis response of early 2020, options in the two markets both surged. Ever since then, the correlation between the crypto market and the stock market is even stronger than that of stocks and other assets such as gold, bonds, and even fiat.

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When options in the stock market surge, the cryptocurrency market follows. And when the stork market experiences setbacks, the crypto market follows suit.

Crypto Versus Indices

Indices according to investopedia.com, is a method of tracking the performance of a group of assets in a standardized way’. In some areas, indices represent and measure the performance of a group of financial assets, representing them on one chart as a single, tradable asset. 

Indices can either be broad-based indexes that represent large chunks of the market such as the S&P 500, NASDAQ, and Russel 3000, or indexes that represent a special portion of the market.

However, while a correlation between the crypto and the stock markets has been observed over the years, there has been no valid data to suggest that the crypto market is related to or dependent on financial indices.

In recent times, the 90-day correlation between S&P and Bitcoin has risen to its highest since October 2020 according to Arcane Research’s weekly newsletter.

The Crypto Market And Inflation

Inflation put simply, is an economic term that refers to the rate at which a currency’s value weakens over time. This weakening of said currency ultimately affects the general prices of goods and services.

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A good example of this is old TV adverts where goods and services that could be bought for less than a dollar in the 90s are now being offered for more than $10 per unit.

Crypto Versus Inflation

There is a standing argument about bitcoin (and by extension, other cryptocurrencies) being an inflation-resistant digital asset. And bitcoin truly is an inflation-resistant asset. In some ways.

This is because one of the contributing factors to fiat currencies’ weakening is the rate at which new bills can be printed, diluting the current market value of the existing bills.

Cryptocurrencies, on the other hand, have a way around this problem. This means that the supply and therefore availability of most cryptocurrencies are fixed. The supply of bitcoin, for example, is hard-capped and expected to run dry around the year 2130. 

Approximately every four years, bitcoin’s protocol cuts the rewards reaped from mining new bitcoin by half, in a phenomenon known as halving.

Bitcoin is the most dominant cryptocurrency at the time of writing. It affects the prices of all other cryptocurrencies when this happens. This increases the potential value and acts directly against inflation in the process.

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Jim Haastrup is a freelance blockchain and metaverse writer. He helps founders, investors, startups, crypto, and blockchain enthusiasts connect with their audience and win investment through the written word.

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