Crypto & Stocks Move in Lockstep: What’s Behind Their Record-High Correlation

Key Takeaways

• Data shows a record-high correlation between cryptocurrencies and U.S. stocks.
• Traditionally, crypto investors relied on speculation and market news, but this trend is shifting.
• However, crypto remains influenced by factors like technological advancements, market adoption, and liquidity.

Recent data reveal a record-breaking correlation between cryptocurrencies and U.S. stocks. This means that the factors traditionally influencing stock prices, like interest rates and economic data, are now significantly impacting the crypto market as well.

This raises critical questions about the future of crypto and how the broader economic environment will impact it.

Crypto and U.S. Stocks Hit Record Correlation

A recent correlation reveals that digital assets and U.S. stocks are exhibiting a higher degree of synchronicity than at almost any point in the past. This suggests that the macroeconomic factors influencing equities are also significantly shaping the crypto market.

The 40-day correlation coefficient between a basket of the top 100 digital assets and the S&P 500 Index has reached approximately 0.67. This level has only been surpassed during the second quarter of 2022, when it peaked at 0.72.

A correlation coefficient of 1 indicates a perfect positive correlation, while -1 signals a perfect negative correlation.

The correlation between U.S. stocks and cryptocurrencies hit its record recently. l Credit: Bloomberg News

Last week, U.S. stocks achieved new all-time highs, and Bitcoin (BTC) surged past $64,000, following the Federal Reserve’s aggressive 50 basis-point interest rate cut. This marked the beginning of an anticipated monetary easing cycle.

Traders across various asset classes are now closely monitoring incoming U.S. economic data for insights into the potential extent and pace of future interest rate reductions. And this is also happening in the crypto world now.

Economic News Impact on Crypto

Historically, crypto traders often made investment decisions based on speculation or market news. However, recent trends suggest a shift towards a more traditional approach, where macroeconomic factors dominate.

Analysts Myriam Ben Osman, Christian Urom, Khaled Guesmi, and Ramzi Benkraiem observed that positive economic news can boost investor confidence, increasing demand for cryptocurrencies as a potential hedge against inflation and economic uncertainty.

The growing popularity of Bitcoin has spawned numerous other digital currencies, and investors in these altcoins often anticipate replicating the substantial profits generated by Bitcoin’s price surge.

Treasury yields performance during main crypto events. Credit: Standard & Poor’s

Standard & Poor’s noted that both bullish and bearish periods in the crypto market have coincided with periods of both ultra-loose and significantly tightened monetary policies.

Nevertheless, a distinct difference persists. Cryptocurrency prices appear less sensitive to macroeconomic factors, compared to traditional financial assets. Market confidence, adoption, technological advancements, and liquidity conditions are key drivers for cryptocurrencies.

In contrast, macroeconomic indicators like interest rates and inflation heavily influence traditional financial assets. Additionally, these traditional assets are subject to government regulations and stricter transparency requirements, such as know-your-customer and anti-money laundering measures, according to S&P analysts.

What To Expect

As we’ve seen, despite being influenced by technology and market sentiment, crypto assets are not immune to macroeconomic shifts. As more institutional investors enter the crypto market, the correlation between crypto assets and macroeconomic indicators may strengthen, aligning more closely with traditional financial assets.

This could lead to increased contagion risk, potentially flowing in both directions.

Regulators are increasingly scrutinizing cryptocurrency risks, highlighting the evolving interconnections between the crypto ecosystem, the global economy, and financial markets.

A study revealed that Bitcoin and U.S. stocks exhibited a high correlation from 2020 to 2022, as some financial institutions treated crypto assets like growth stocks. This correlation weakened following the 2022 crypto market turmoil, which deterred some speculators.

However, Chen anticipates a resurgence in correlation, as Bitcoin ETFs attract more institutional investors. These institutions are likely to trade crypto assets as risk-on assets.

They noted that once the crypto market reaches a substantial size, it will naturally become a component of larger funds’ portfolios, leading to trading patterns similar to stocks.

Researchers also emphasized that as Bitcoin ETFs attract more inflows, Bitcoin’s price movements may become more closely tied to Wall Street trends.