Hello every one, Some years ago, when these crypt things entered the market scene, they were, at best, perceived as another distinct class of assets-an equivalent could be drawn of rebellious teenager who stands at par apart from the traditional stock market.
However, time would be telling that the lines linking the two began blurring over time. If you are a close observer of the market trends, you would notice that the peaks or crashes of stock markets are echoed in the crypto world or vice versa.
So, why is it? And to what extent are the two related? Let's dive into it.
The Growing Overlap Between Crypto and Stocks
This is the truth: there are hedge funds and banks holding cryptoassets; publicly traded companies with them in their books. Anytime such gigantic entities feel the impact of a sector-wide selling spree or even macroeconomic uncertainty, then the damage become magnified.
they sell not only stock -they liquidate cryptocurrencies as well . That is one of the reasons why Bitcoin tracks the S&P 500 or Nasdaq mostly.
I see that with huge economic events such as interest rate hikes or inflation data releases, both crypto and stocks react in a similar way. It's almost like crypto has graduated from being a rogue outsider to a part of the bigger financial family.
Macro Factors Driving the Correlation
Why do crypto and stocks seem to move together these days? A big reason is that they're both influenced by the same macroeconomic factors. For instance:
Interest Rates: When central banks raise interest rates, riskier assets like tech stocks & cryptocurrencies take a hit. Investor move their money into safer options, creating a parallel downturn.
Inflation: High inflation often spooks both markets. Where Bitcoin was once touted as "digital gold" & a hedge against inflation, it is behavior in a reality has been closer to that of risk assets rather than a safe haven.
Investor Sentiment: Markets are emotional. Fear & greed drive decisions. If Wall Street is panicking over recession fears, you can bet the crypto world is not immune.
That said, correlation is never absolute. At times, crypto does it is own thing. For example, if there is some major upgrades like Ethereum shift to proof-of-stake or during Bitcoin halving events, the crypto market might soar even while stocks are static.
Why are cryptocurrencies and equities seeming to go up in tandem, at least on some days?
There's an important factor: both respond similarly to a set of broad macroeconomic factors. Examples include the following:
Interest Rates: Central bank increases tend to make the overall economy worse for riskier assets like technology stocks and crypto. Everyone moves money to safer choices, so everyone's also going down together.
Inflation: High inflation normally scares both markets. Once referred to as the "digital gold" that was said to be an inflation hedge, Bitcoin is actually showing more risk behavior than that of a haven.
Investor Sentiment: Markets are emotional and the fear of loss and greed is the motivation for investor decisions. If Wall Street is afraid that the economy is going into a recession, you can take an educated guess that the world of cryptos isn't exempted either.
That said, this correlation is not absolute. There is always a time when crypto takes over its own way of thinking. For example, during the time when Ethereum changed to proof-of-stake or during Bitcoin halving events, the crypto could be rallying while stocks are weak.
Does This Correlation Matter for Investors?
If you are an investor like me, you have probably asked yourself: “So what does this mean for my portfolio?” Well, the growing connection between stocks & crypto can cut both ways.
On the one hand, it means crypto is maturing as an asset class. It’s gaining legitimacy & recognition. On the other hand, it is no longer as much of a diversification tool as it once was.
If you’re hoping crypto will act as a hedge when stocks fall, think again. More often than not, both markets now move in tandem, especially during major economic turbulence.
So we need to invest thinking of this new reality. Diversification remains more crucial than ever, but relying solely on crypto as a "different" asset class might not be the safest bet anymore.
Conclusion
The correlation between crypto and stock markets has evolved over time, influenced by macroeconomic factors and institutional involvement.
This was once a wild, uncorrelated asset, and it is becoming increasingly intertwined with traditional markets. And as investors, we should be ready to adapt ourselves to this changing dynamic with well-informed decisions regarding these interconnected markets.
After all, understanding these trends is half the battle in maximizing returns.
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