If you’re a stock market investor looking for relief in crypto, you’ve been out of luck this year.
Stocks and cryptocurrencies are very different types of investments. Yet the stock market and cryptos like bitcoin and ether have moved largely in tandem during many of the big ups and downs that investors have experienced in 2022. Just look at June when the S&P 500 fell into a bear market – and Bitcoin, the largest cryptocurrency by market value, also plummeted.
That doesn’t bode well for one of the main pro-crypto arguments: that it can help diversify your portfolio, since crypto prices are said to be uncorrelated with stock prices. If instead crypto prices rise and fall in a similar trajectory to stocks, as they’ve been doing lately, that undermines one of the arguments for holding crypto.
But while experts acknowledge that prices have been undergoing similar price patterns recently, they say there’s a bigger picture for investors to consider. And the convergence of stocks and cryptos could even bode well for the crypto industry as a whole.
“This is evidence of a positive trend,” said Greg King, CEO and founder of Osprey Funds. This trend is the increasing acceptance of crypto.
Here’s what you should know about why stock and crypto prices have reflected for the most part this year, and what we can expect going forward.
Stock and crypto price patterns
Morningstar saw the $10,000 growth invested in the MVIS CryptoCompare Digital Assets 100 Index, which tracks the performance of the 100 largest digital assets, compared to the $10,000 growth invested in the S&P 500 from the start of the year through March 13. September invested.
As you can see, the two lines have moved similarly so far in 2022:
Whether you’re looking at stocks or bonds, cryptos or commodities, financial markets have seen a lot of volatility this year. Much of this has been attributed to the Federal Reserve’s response to skyrocketing inflation.
The central bank has hiked interest rates – most recently by three-quarters of a percentage point – to try to combat rising consumer prices. While these increases are implemented with the goal of cooling the economy without sending it into a massive downturn, they also tend to depress the price of financial assets like stocks and cryptos. There are also geopolitical tensions affecting markets.
Just because crypto has very different fundamentals than an asset like stocks doesn’t mean it’s immune to the same kind of sell-offs when investors get scared.
“Crypto is a very risky asset class and as such is trading in line with other risky assets right now,” says King.
As Madeline Hume, senior research analyst at Morningstar, puts it, “Most of the time, when something goes wrong, it goes wrong in many different places at the same time.”
And the more crypto gets integrated into people’s portfolios, the more it will obey the laws of people’s portfolios, she adds.
What this means for crypto prices
A decade ago, there wasn’t much overlap between bitcoin holders and institutional shareholders — but times have changed, says King.
“If you have the same people holding stocks and crypto, then maybe if these companies or individuals become risk averse because of the macro environment, they will sell risky assets proportionately across a portfolio,” says King. “It’s just a sign of maturation in the crypto space and increasing adoption by a wider audience.”
Professional investors are typically interested in quarterly and annual performance data, which he adds is “a bit at odds” with long-term buy-and-hold investors. If crypto investors were just buy-and-hold investors, we wouldn’t see selling even during these shifts in the macro environment, including factors like high inflation and global tensions, but we are.
“While this may be negative for price activity in the short-term, it is positive for the long-term potential future appreciation of bitcoin as it shows increasing adoption by a professional investor class,” King says.
Can we count on stocks and crypto to move together?
As we see more acceptance, the pattern can become stronger.
“As crypto becomes more mainstream and there is more hype, I think you will just see that correlation play more,” says Ali Pourdad, CEO of Quantfury Trading.
But just because we’re seeing this pattern now doesn’t mean we can expect crypto and stocks to move in tandem all the time.
“Broadly speaking, crypto is quite different from stocks compared to other asset classes,” says Morningstar’s Hume.
Morningstar doesn’t necessarily recommend crypto as part of a diversified portfolio. While crypto may not be exactly what stock-hedge advocates were hoping for, it does correlate somewhat with some asset classes that Morningstar calls diversifiers for stocks, Hume says.
It is important to keep in mind that financial markets have been struggling lately. When things are going smoothly, asset classes tend to move based on their respective market’s unique fundamentals, rather than going down all at once, she adds.
Also, just because two asset classes are moving in a similar direction doesn’t mean they’re necessarily for the same reasons. For example, stocks may have rallied in August at the same time as crypto prices were soaring, but other forces were at work.
“While you might think this is just because the two are generally more connected, there were positive developments in Ethereum at the time,” says Hume, referring to an update to the Ethereum blockchain that should hit the web much more energy efficient. “It’s always important to look under the hood and see if there are any idiosyncratic factors that can explain the relationship before you paint with a broad brush and say they’re totally connected now and will be together in the future.” will move. “
What does this mean for crypto investors?
Investors should consider crypto independently of traditional stocks, Pourdad says.
“Certainly if you look back far enough there were a lot of instances where there was no correlation and crypto did its own thing,” he adds.
Also, crypto should really remain a small percentage of your portfolio — between 2% and 5%, as some financial advisors recommend — if you invest in it at all. It’s a highly volatile asset, and its future still looks a bit bleak, in part due to the lack of clear regulation.
If you decide to buy crypto, experts tend to say that you shouldn’t try to time the market. Instead, treat crypto as a long-term investment that you buy and hold.
“If you believe in the underlying assets you’re investing in, just hold like you would making a stock market decision,” says Pourdad.
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