Bitcoin and ethereum’s prices have been unusually stable in recent days. That’s remarkable for crypto — notorious for its price volatility — especially since the stock market closed its weakest September since 2008 last week.
The crypto and stock markets have generally moved together this year. So, some crypto investors may wonder if the two are starting to diverge, as bitcoin and ethereum have held steady while the stock market has fallen. Experts aren’t so sure, at least not yet.
Bitcoin’s price has been above $20,000 since it rose above that Wednesday afternoon, but there’s no guarantee it will stay there or push up further. The token has struggled to stay above that key price point over the past two weeks, mostly sticking to the low $19,000 range. At times, the sign dipped into the $18,000s. Ethereum followed a similar trend, sticking to the $1,300 range and swinging above and below that price at times over the past two weeks.
Despite these lows – more than 60% since the start of the year – the tokens have remained resilient over the past two weeks as share prices have collapsed. This may indicate that the correlation between crypto and the stock market may be loosening, but not enough to break loose yet.
“They’re still very correlated,” said Ben McMillan, CIO of IDX Digital Assets, an asset management firm in the crypto and digital asset space.
“We expect them to not be so highly correlated going forward,” he said. “But I think a positive correlation between bitcoin and risk assets, especially things like tech stocks, is here to stay. It’s something investors need to think about in their positioning now that they can no longer necessarily rely on a low correlation between bitcoin to tech stocks or bitcoin to stocks going forward.
So what would it take for crypto to break away from the stock market? We asked experts to find out.
Will Bitcoin and Ethereum Prices Ever Stop Following the Stock Market?
Over the past year, crypto has closely followed the stock market, specifically tech stocks. The correlation was seen most sharply over the summer, when the correlation between bitcoin and the S&P 500 was nearly one-to-one.
These digital assets are designed to operate outside the mainstream financial system, but investors’ evolving understanding of the tokens as they have become more popular in recent years has driven a connection a between crypto and the stock market.
“It has to be a non-correlated asset,” says Douglas Boneparth, CFP and president of Bone Fide Wealth. “But as the market caps have increased, people see it as a risky asset, as they should, but they don’t see it as an alternative to risky assets. They are piling into bitcoin just like their tech stocks.”
A growing appreciation for the underlying technology, also known as the blockchain, has also prompted investors to treat crypto similarly to tech stocks, according to McMillan. He points out that blockchain actually provides utility, contrasting bitcoin and its ilk with gold, which does not provide utility. By doing so, investors recognize that bitcoin is not just a digital proxy for gold, McMillan explained, but built on technology that will power things like web3 and DeFi. As a result, crypto began to trade more like a tech stock.
So what will it take for crypto to stop tracking the stock market? It needs more time to develop as its own distinct asset class, according to both McMillan and Boneparth. How – and whether – it carves out is still up in the air.
One possible way for crypto to get there is to gain more practical use, and for that it will need supporting infrastructure, according to Boneparth. Integrating crypto wallets with iPhone wallets and being able to tap and pay just like you do with your credit card will provide one way for more practical use.
“As bitcoin and ethereum’s ecosystems develop, they will begin to have their own unique risks,” McMillan said. “At the moment they are still acting like technological proxies. But as bitcoin and ethereum ecosystems develop, as more applications are built on top of them, as the use cases become wider and more diversified, I think they will start to look more like their own respective asset classes.
If that happens, we can expect a disconnect between crypto and tech stocks.
What should crypto investors do if digital assets continue to track the stock market?
Nothing. Crypto is a volatile and risky asset, and this will be true whether its performance tracks the stock market or not. And the consequences will continue to be overloaded during this time of economic uncertainty in the US
This year’s financial story has depended largely on the Federal Reserve’s moves to combat inflation – and this is likely to continue during the final months of the year. The Fed will likely continue to raise rates to combat inflation, which will have necessary pain points for the economy, and this will likely send crypto and stocks reeling.
Experts say you should allow your investments to ride out the lows; avoid selling low in a panicked frenzy after buying high. For now, you want to take a long-term perspective and give your investments the time and rest they need to mature.
Experts suggest that you dedicate no more than 5% of your portfolio to crypto and only invest what you are ready to lose. And be careful not to make impulsive moves when the crypto market drops suddenly, as it often does.
