Cryptocurrencies are a nascent industry. As such, no trading day mirrors the previous one. Traders are learning how to play the market on the go. Trading patterns are rarely repeated, and uncertainty about how cryptos like Bitcoin will react to particular events often clouds over traders’ heads. While historical data doesn’t help much as well, if we dig deeper, we can identify some repeating traits in the price behavior of Bitcoin and stablecoins that can help amplify gains.
The key to success is analyzing the market, learning how to trade cryptos, and practicing it before investing. A crypto exchange with an integrated paper trading functionality is considered one of the best ways to learn how to trade cryptocurrencies. The simulator allows investors to practice crypto investing without risk and helps understand how the market behaves during multiple time frames, like the daily or one-minute chart. During the learning phase, investors should only use the paper trading functionality. Once the tested crypto strategies show longer-term profitability, investing real money in crypto becomes an option.
Bitcoin Correlation With the Stock Market
The correlation between various markets becomes important with longer-term investments. If we look at the past performance of Bitcoin and the S&P 500, we will see that they are moving in the same direction most of the time. Historically speaking, there are more periods when Bitcoin was positively correlated with the stock market than when the correlation was inversed.
However, since 2020, this effect is even more glaring, especially when it comes to the link between the tech part of the stock market and the leading digital asset. Recent data shows that Bitcoin’s movements are increasingly starting to mirror U.S. stocks to an unprecedented degree in history.
For example, the 40-day correlation between Bitcoin and Nasdaq-100 recently hit 0.66, the biggest since 2010. The historical link between Bitcoin and the S&P 500 also indicates a stronger positive relationship.
Data shows that the digital asset has moved in line with the market significantly more frequently than against it. Furthermore, correlation levels between Bitcoin and the S&P 500 are also nearing record highs.
All this proves that there is a positive correlation between Bitcoin and the stock market and that their interconnectedness is growing stronger.
Trading Cryptocurrencies in Different Market Conditions
When things are calm, and the economy is booming, which is basically 90% of the time, the general market trend is positive. As a result, Bitcoin and most altcoins are also more likely to experience positive price movements in most cases. However, this is not to say that cryptocurrencies can’t lose value during bullish stock market periods.
Just the opposite – such situations might be unleashed by specific negative crypto-related market news. These can include anything from a hack of a major exchange or theft of digital assets to a Bitcoin ban in a particular jurisdiction or another regulatory decision.
The more interesting and complicated case is tracking the price performance of Bitcoin when the stock market is going down. Triggers for times like this usually are all types of destabilizing events that might last for extended periods. Unfortunately, recent history has given us plenty of instances to examine and see how cryptocurrencies performed during challenging times.
The two most recent examples are the COVID-19 pandemic and the war in Ukraine.
When the WHO announced that we were entering a global pandemic, Bitcoin tanked over 50%. This was well over the 20% fall in the value of the S&P 500. Moreover, during the COVID pandemic, the cryptocurrency exhibited a positive correlation of 0.6 with the global equity market, which is near its record highs.
When Russia invaded Ukraine on February 24th, 2022, the S&P 500 fell 2.25%. Bitcoin lost 8% of its value, while other leading altcoins fell by over 10%.
These recent examples highlight that Bitcoin mirrors the performance of the stock market and that it amplifies the losses and the gains. Alternatively, it behaves like a highly leveraged position that follows the market but in a more volatile way.
So what does this mean for traders? It means that Bitcoin isn’t the asset to “weather the storm.” Instead, it is a very reactionary and very volatile asset class. Think of it as the “S&P 500 on steroids.” As such, trading cryptocurrencies during both the good and the bad times can significantly help active traders grow their profits by capitalizing on the up and down moves. Of course, this isn’t always the case. Traders should also be aware of crypto-specific news that can massively affect the digital asset market while attracting no interest from the stock market.
Bitcoin is often touted as “the digital gold.” However, its recent track record proves it is more like a digital version of the stock market, showing strong gains when things are going well and suffering massive losses when things are going south.
This interconnectedness between both asset classes has raised the risk of spillovers of investor sentiment, while a situation where the sentiments in one market can quickly transmit to the other. Spillovers usually increase in periods of financial market volatility.
While this isn’t an ideal scenario for many bullish crypto traders, it gives an alternative angle for market analysis. Investors can look at the crypto market-specific events and use the stock market as confirmation.