Cryptocurrency has been around for years — long enough for evidence of a correlation between its performance and the stock market to emerge. Is this trend genuine or a symptom of some other market influence? How can investors use this information to their advantage?
Cryptocurrency Market Changes Impact the Stock Market
As cryptocurrency markets fluctuate, they impact the valuation and performance of blockchain-related stocks. Evidence shows a cross-correlation between the values of blockchain, cryptocurrencies and the Nasdaq markets.
According to one study, significant fluctuations in crypto lead to small shifts in blockchain exchange-traded funds. These correlations are positive, meaning they move in the same direction, whether they trend upward or downward.
This relationship makes sense. Like stocks, cryptocurrency investors trade based on price speculation rather than intrinsic value — and stock prices reflect predictions and influences because the stock market is a forward-looking instrument.
Noticeable Correlations Between Crypto and Stock Prices
At this point, digital currencies have morphed into an investment asset class because of investors’ decisions. They inadvertently create a price correlation since they treat it like other speculative assets. People whose blockchain stocks are doing well are inclined to put more money into Bitcoin (BTC) — and vice versa.
This means cryptocurrencies react to market influences like equities do. Those who deal in digital currency likely have various stocks, meaning their decisions influence their entire investment portfolio. When they invest or pull out in one place, it affects the others.
The Nasdaq Blockchain Economy Index (RSBLCN) measures the returns of companies that commit material resources to developing, researching, supporting or utilizing blockchain technology. After a minor drop from January 2020 to March 2020, its price per share rose from about $950 in March 2020 to around $2,350 in March 2021.
BTC followed a similar pattern, rising from about $8,000 to roughly $60,000 in the same period. This year-long increase is among the largest relatively consistent ascending trends both have had. Following this upward trajectory, both lost value at a similar rate from around November 2021 through early 2023 — more proof of their positive correlation.
Cryptocurrency also noticeably affects the valuation of financial technology stocks. The Nasdaq-100 Technology Sector (NDXT), which represents the United States technology market, experienced a minor drop from January 2020 to March 2020, similar to BTC and RSBLCN. Then, it trended upward in a similar pattern.
NDXT’s price per share increased from $5,189 in March 2020 to $8,033 in March 2021. After it peaked in November at around $9,450, its value consistently dropped until 2023. This trend follows the same pattern as BTC and RSBLCN, further evidence of their positive cross-correlation.
Examples of Cryptocurrency Performance Influencing Stocks
Professionals can point to several specific events as proof of cryptocurrency’s influence on the stock market. One of the most significant is the depegging of TerraUSD (UST), a once-popular digital token. It prompted investors to sell off crypto en masse. It went from one of the largest stablecoins to being virtually worthless.
The price of UST was relatively stable, hovering at around $1,000 per 1,000 units for years. Then, it declined from $1,000 in April 2022 to $25.61 in May, losing over 95% of its value within one month. This crash affected investor confidence, prompting them to pull out.
This ripple effect is visible in BTC, as it lost approximately $10,000 in value in this period — and continued trending downward for months afterward. Naturally, this valuation decline was mirrored in both NDXT and RSBLCN.
Bitcoin halving — where the reward for mining halves every 210,000 blocks — has also had an impact. There will only ever be 21 million BTC mined, so this process favors investors. In May 2020, after one instance of halving, BTC had one of its largest valuation increases. NDXT and RSBLCN followed suit, demonstrating the influence of supply and demand.
How Crypto Investors Can Use This Information to Invest?
While cryptocurrency crashes lead to blockchain and technology stocks losing value, favorable processes like halving inspire confidence in the market. Investors who understand this and know the markets are connected can make better investment decisions. They can maximize their gains by strategically investing and pulling out around these events.
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