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Crypto and stock market correlation

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Back in 2008, when the global financial crisis was on fire, the anonymous Satoshi Nakamoto revealed an alternative for traditional money β€” the first cryptocurrency called bitcoin (BTC). In a white paper, he noted that the project is fundamentally different from all payment systems available on the market due to its decentralized nature: people do not need banks and other third parties to conduct operations with bitcoin. The crypto community provides everything the system requires.

In theory, Satoshi Nakamoto's invention allows users to completely abandon fiat currency. In reality, things became more complicated: bitcoin cannot exist apart from the global economy. BTC and its altcoins began to mimic stock market movements.

Let's figure out why this happened and what benefits can be derived from this.

The distinctions between cryptocurrency and stock markets

People buy cryptocurrency and stocks for different reasons. Crypto is mainly used as a tool for earning money in the long term, while some digital assets (for example, stablecoins) are useful for saving money.

Not everyone is involved in the stock market. In May 2022, Gallup analysts revealed research that says only 58% of Americans own stocks. The young crypto industry has an even smaller audience. In August 2022, Pew Research Center analysts found that only 16% of Americans have ever invested, traded, or used crypto to conduct transactions.

First, let's find the differences between the two markets by comparing the crypto industry and the stock market according to three criteria: size, riskiness, and volatility.

Size 🐘

The crypto market has existed for more than a decade, although it still occupies a very small share of the overall financial market. At the beginning of February 2023, its capitalization, according to CoinMarketCap, was over $1 trillion.

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Cryptocurrency market capitalization. Source: CoinMarketCap.

For comparison, only the technology company Apple has a market capitalization of $2.4 trillion, according to companiesmarketcap. And the total capitalization of the stock market exceeds $87.441 trillion.

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The top 10 biggest companies in terms of capitalization. Source: companiesmarketcap.

This means that the entire digital asset market is comparable to the Amazon e-commerce platform. At the same time, the small size allows the crypto industry to grow much more actively than the stock market, with the waves of new financial injections.

Riskiness of investments πŸ’£

Cryptocurrency is not a totally regulated tool. In some countries, such as Iraq, the new financial instrument is restricted. Anyway, that doesn't mean that crypto users who are lucky enough to live in crypto-friendly countries never face risks tied to crypto investments.

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Bitcoin legality map. Source: CoinDance.

Even if a market participant has acquired coins legally, they may still be a victim of fraud, hacks, and other restrictions, including a ban. For example, in February 2022, the Dmarket NFT platform froze the accounts of Russians for political reasons. The Ukrainian Minister of Digital Transformation, Mykhailo Fedorov, explained the step: according to him, the assets were frozen due to their use to cover Ukrainian army needs. It is important to clarify that such incidents are the exception rather than the rule. Following well-known security rules and using only trusted platforms can reduce risks.

The stock market, in turn, is fully regulated. However, even this condition cannot protect investors from the depreciation of purchased assets.

Volatility πŸ„

We should always keep in mind that cryptocurrencies have a high level of volatility. Coins' prices can either rise significantly or fall dramatically in a short period of time. Here are a couple of fresh examples:

πŸ“‰ From November 6 to November 9, 2022, during the largest crypto exchange's FTX bankruptcy, bitcoin fell by 27%.

πŸ“ˆ In the period from February 12 to November 14, 2023, with the positive US inflation data release, which indicated the economy's increase, bitcoin rose by 24%.

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Bitcoin chart. Source: Investing.

Not everyone is ready for such volatile price movements. On the other hand, earnings on speculation in crypto are higher than ones on the stock market. In the crypto industry, you can almost double your capital in a short time with strong market fluctuations. Stock fluctuations produce significantly less profit.

What factors influence stock market behavior

Regulators step in when the economy faces trouble. Investors focus attention on the US Federal Reserve System's (FRS) actions at first. The thing is that the watchdog is responsible for the health of the world's largest economy.

In 2022, due to the escalating geopolitical arena conflict, the US faced rising inflation. In turn, the Fed started interest rate hikes. The changes made the US dollar more expensive, which helped slow down inflation.

In 2022, the market went through four Fed 0.75 percentage points (p.p.) rate hikes. By December, the watchdog reduced the rate increase step to 0.5 p.p. In February 2023, the Fed reduced the step again, this time to 0.25 p.p.

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Fed interest rate chart. Source: tradingeconomics.com.

Goldman Sachs expects the Fed's key rate to hike above 5% in 2023 and hold it at that level until 2024. An upcoming rate increase, according to JPMorgan, will continue to put pressure on the stock market.

The stock market's "health" depends on the economy's condition. For instance, stocks always react to crises with a fall. Against economic rise securities, on the contrary, are growing. That is easy to explain. When the dark times come, people are less open to spending money on investments. In response to the crisis, many are selling their assets, which pushes the securities market down. During the economic recovery, when free money comes on the market, people are starting to invest again, and these changes push stocks up.

The S&P 500 index will help us visualize the stock market's reaction to changes in the economy. It tracks the prices of 505 shares of the 500 largest public companies traded on US stock exchanges. The S&P 500 and other major indices, along with Nasdaq, determine the condition of the US economy, which remains the world's largest, and affects the whole financial market.

Here is an example how S&P 500 drop of almost 60% due to the global financial crisis of 2008:

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The S&P 500 reacted to the 2008 financial crisis. Chart: Investing.

And here is how the S&P 500 reacted to the first global outbreak of the COVID-19 pandemic in the spring of 2020:

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S&P 500 behavior during the COVID-19 pandemic's spring 2020 splash. Chart: Investing.

The last stock market downtrend was revealed at the beginning of 2022, against the backdrop of aggravation in the geopolitical arena tied to the Russia and Ukraine conflict.

Crypto and stock market correlation

First, let's illustrate the difference between the volatility of stocks and digital assets. In order to do this, let's compare the S&P 500 with bitcoin on a daily chart over a four-year period. The chart shows how the BTC behavior (purple curve) differs from the much more capitalized and heavier index.

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Comparison of bitcoin and S&P 500 behavior. Chart: Investing.

Now let's zoom in on the graph in order to see how bitcoin is driven by the stock market. We need a smaller time period: let's say, a year. The chart shows that BTC's behavior is almost identical to that of the S&P 500. At the same time, bitcoin's movements are more broad compared to the index. For example, where the S&P 500 declines by 10% (example #1 on the chart), BTC loses almost 35% in price. At the same time, at some moments (example #3 on the chart), bitcoin repeats the index movements with a slight delay.

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Comparison of bitcoin and S&P 500 performance. Chart: Investing.

According to The Block, bitcoin and S&P 500 correlation returned to their maximum values at the beginning of 2023.

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Bitcoin and S&P 500 correlation. Source: The Block.

Bitcoin and its altcoins behave similarly to stocks. In the securities market, the most important thing is the purchaser's expectations and their strong faith in the company's success. At the same time, the stock market is controlled by watchdogs, which may soften the panic in some cases. Crypto investors do not have such support. Despite this, cryptocurrencies have become an important asset that has taken its place in the investment market. Therefore, it can be assumed that in the long term, when the global crisis will be replaced by economic healing, both stocks and the crypto industry will continue to grow.


The digital asset market's flagship, bitcoin, mimics stock market movement, which, in turn, relies on the watchdogs' actions. In essence, these are the regulatory authorities of the world's largest economies, the first of which is the United States. The stock market has been under pressure as a result of the US Fed's struggle with inflation. So, stock-led cryptocurrencies also lost the chance to grow. Digital assets will be able to show positive dynamics only against the backdrop of the stock market recovery, which means that crypto investors should closely monitor the global financial watchdogs' actions and the large indices' reactions.

Sometimes cryptocurrency's reaction is delayed. Such occasions present opportunities to profit from the mimics of "big brother's" behavior. 

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This material is not an investment recommendation. The financial and other transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about conducting any operations with cryptocurrency and / or tokens.

Maria Kachura
Maria Kachura

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