Digital currencies like Bitcoin are a relatively new asset class that have seen rapid growth and adoption over the past decade. As cryptocurrencies become more mainstream, their price movements and trading behavior have started to resemble those of traditional assets like stocks.
You can also trade more effectively by using a reputable trading platform like the BitiCodes platform. There are several key reasons why Bitcoin tends to trade in a similar pattern to the stock market.
Bitcoin is Now Seen as an Investable Asset
In the early years of Bitcoin, it was largely used by tech enthusiasts and treated more like a commodity than an investment asset. However, as cryptocurrencies have matured, major financial institutions are now offering exposure to digital assets. Large companies like Tesla and MicroStrategy hold Bitcoin on their balance sheets. Major exchanges like CME Group and major brokerages now allow trading of Bitcoin futures and funds that track its price.
This mainstream adoption means Bitcoin is now seen as a legitimate investable asset, much like equities. Large investors can obtain exposure to Bitcoin just as they would stocks or other alternative assets. This brings Bitcoin more in line with the broader financial markets.
Correlation with Investor Sentiment
Stocks and other risk assets like Bitcoin are largely influenced by investor sentiment. When sentiment is positive and risk appetite is high, investors tend to bid up the prices of equities and other speculative investments like Bitcoin. When sentiment turns cautious, both stocks and Bitcoin tend to decline in tandem.
Periods of volatility in the stock market are often echoed in crypto markets. For example, the large pandemic-induced sell-off in March 2020 led to sharp declines in both the S&P 500 and Bitcoin prices. As optimism returned to stocks in late 2020, Bitcoin also rallied to new highs.
This correlation with broader investor sentiment causes Bitcoin to trade in a similar pattern as stocks. When one drops, the other often follows suit.
Overlapping Investor Base
The investor base for stocks now significantly overlaps with those interested in Bitcoin as an alternative asset. Many institutional investors have allocation to both equities and crypto assets as part of their portfolio strategy. Retail trading has also increased dramatically since 2020, with the same platforms allowing trading in stocks, options and cryptocurrencies.
This shared investor base means money tends to flow between stocks and Bitcoin in a correlated fashion. When equities decline, investors may liquidate both stocks and Bitcoin to reduce risk assets in their portfolio. And when risk appetite returns, money tends to flow back into both markets. This contributes to the frequently aligned price action.
Susceptibility to Macroeconomic Forces
The prices of financial assets like stocks and Bitcoin tend to be driven by macroeconomic trends like growth, inflation and monetary policy. For example, expectations for rising inflation and tighter Fed policy have weighed on both Bitcoin and stock prices in 2022.
Stocks and crypto assets like Bitcoin are valued based on expected future cash flows or network adoption, which are impacted by the broader economy. So macro conditions that are favorable to stock prices also tend to boost speculative assets like Bitcoin, creating a strong correlation.
Trading Behavior and Algorithms
Trading in both the stock market and crypto markets is dominated by institutional investors and algorithms. Sophisticated traders employ algorithms and automated trading systems across assets like stocks, options, futures and cryptocurrencies.
These systems identify technical patterns, momentum, arbitrage opportunities and other signals across markets. So algorithmic trading activity in stocks can have a ripple effect into crypto markets, linking their price movements. This systematic trading behavior contributes to co-movement between Bitcoin and equities.
Maturing Asset Class
As an asset class matures, its trading behavior typically becomes more correlated to other developed markets like stocks. This normalization appears to be occurring with Bitcoin, as seen by its increasingly stock-like trading patterns.
Initially, Bitcoin prices were determined primarily by cryptocurrency-specific events like new protocol upgrades. Now, just like stocks, Bitcoin responds more systematically to investor sentiment, economic forces, trading activity and other broad market factors. This maturation and integration with mainstream finance explains its stock-like trading.
In recent years, Bitcoin has evolved from an obscure cryptocurrency into a mainstream investable asset that behaves much like equities. The adoption of crypto by major institutions, overlapping investor base, susceptibility to macro factors, and prevalence of algorithmic trading are key reasons Bitcoin now tends to trade in line with the stock market.
This trend seems likely to continue as digital assets become more integrated into investor portfolios. But Bitcoin will also continue displaying its signature volatility. While its long-term potential remains appealing, investors should brace for a bumpy ride and trade carefully within the context of broader financial markets.
Frequently Asked Questions About Why Bitcoin Trades Like Stocks
Why does Bitcoin follow the stock market?
Bitcoin now trades like stocks because it has become an established investable asset class that is influenced by investor sentiment, macroeconomic trends, trading algorithms, and other broad financial market forces. The same factors that drive stock market moves are now key determinants of Bitcoin price action.
Do Bitcoin and stocks move together?
In general, yes – Bitcoin and stocks demonstrate a strong positive correlation in their day-to-day price movements. When stock prices rise or fall sharply, Bitcoin tends to follow suit. This is because they share common drivers like risk appetite and underlying macroeconomic conditions.
Is Bitcoin tied to the stock market?
Bitcoin isn’t directly tied to the stock market, but its trading behavior is heavily influenced by many of the same financial market dynamics as equities. Bitcoin’s increasing integration with mainstream institutional finance means it responds to investor sentiment, economic trends, trading systems and other factors similar to stocks.
Why did Bitcoin crash with stocks?
Bitcoin sharply declined along with stocks in 2022 due to surging inflation, rising interest rates, and fears of an economic slowdown. These macroeconomic factors drove a risk-off environment, sparking simultaneous selling across speculative assets like tech stocks and cryptocurrencies. It reflected their common susceptibility to investor sentiment.
Does Bitcoin rise when stocks fall?
No – the correlation between Bitcoin and stocks is overwhelmingly positive. Selloffs in equities are usually echoed in crypto markets as investors reduce risk across assets. There is little evidence Bitcoin reliably rises when stocks decline – in most cases they fall in tandem during periods of volatility.
Is now a good time to invest in Bitcoin?
Whether now is a good time to buy Bitcoin depends on your risk tolerance and belief in crypto’s long-term potential. Bitcoin remains highly volatile so it involves substantial risk. But its proponents argue its scarcity makes it a strong hedge against inflation in the long run. As always, only invest what you can afford to lose.
What affects Bitcoin prices?
Bitcoin prices are primarily driven by investor demand, trading activity, crypto adoption rates, forks/upgrades, regulatory news, inflation/economic outlook, and competing cryptocurrencies. As a maturing asset, Bitcoin is increasingly affected by the same macroeconomic forces and investor behavior as equities.
Will Bitcoin prices follow stocks higher?
If the stock market continues rebounding from its 2022 lows, Bitcoin could certainly rally in tandem. However, cryptocurrencies are historically much more volatile than stocks, so Bitcoin’s future price direction remains highly unpredictable. But its trading correlation with equities suggests it may follow a stock market recovery.
Should I buy Bitcoin or stocks?
Either can make sense depending on your goals and risk tolerance. Stocks offer exposure to productive companies but limited upside. Bitcoin offers massive growth potential but also tremendous downside risk. Most portfolios benefit from a mix of stocks for stability and a small Bitcoin position for growth/diversification.