Cryptocurrencies and equities are making headlines as many people wonder if these two asset classes can coexist in the future and in particular, if the prices of cryptocurrencies can decouple from that of equities.
It is difficult to answer these questions due to the nature of cryptocurrencies. However, some similarities between the two markets can give a glimpse of what might happen in the future.
What is a decoupled market?
A decoupled market is an economic system that does not depend on the performance of the stock market. The decoupled market exists alongside the stock market but does not depend on the performance of the stock market to function, which could be considered a form of economic independence.
What is the correlation between cryptocurrencies and the stock market?
There is a close relationship between the price of Bitcoin (BTC) and the value of stocks, especially that of technology stocks. On a daily basis, the correlation between Bitcoin, the leading cryptocurrency in terms of market capitalization, and the S&P 500, which has a strong technological component, reached a value of 0.69.
The correlation value is calculated using a method that takes into account changes in the index and the price of the cryptocurrency over time. In general, correlations greater than 0.5 are considered very high, and those greater than 0.7 are considered extremely strong. On the other hand, those between -0.3 and 0.3 are considered low.
A score of 1 implies perfect synchronization, while -1 represents complete opposition.
The release of Consumer Price Index (CPI) data has impacted both the crypto and equity markets. The inflation rate in the United States has slowed in recent months. It remained close to a four-decade high, however.
However, this post triggered a dramatic sell-off in the stock market, followed by the crypto market.
The CPI and its impact on stocks and cryptocurrencies
The latest CPI release showed continued rapid growth and less stabilization than experts had expected. Contrary to expectations, the CPI rose 8.3% in August, indicating that the pressure on consumers remains strong.
These data proved to those responsible for the Federal Reserve (FED) that more aggressive measures may be needed to lower interest rates. As a result, the FED raised interest rates to slow the economy and manage recent high inflation.
The Fed closely monitors the core inflation rate. Excluding food and fuel, consumer prices rose 6.3% in the year to last month, up from 5.9% in July and more than 6.1% predicted by the experts. Even taking inflation into account, the specifics of the report are concerning.
Stock market reaction to CPI release
Stocks tumbled as August inflation data came in stronger than expected, dampening investor hopes of lower prices and a less activist Fed.
the Dow Jones Industrial Average lost 1,629 points, or 4.99%, to 31,025 points. The S&P 500 lost 4.77% to 3,932.69 points, while the Nasdaq Composite lost 6.75% to 12,050.57 points.
Tech companies have been particularly hard hit, with the semiconductor giant Nvidia which fell 9.5% and the parent company of Facebook, Metawhich lost 9.4%.
Crypto market reaction to CPI release
It turns out that the US inflation rate has not slowed as much as experts had expected. As a result, the future could be more difficult for risky assets: the cost of risky assets saw a sharp drop, with the price of Bitcoin falling from $22,700 to around $21,000.
Ether declined from $1,760 to $1,594, indicating that macro trends have overtaken the positive narrative around this blockchain merger.
Will cryptocurrency prices ever be able to decouple from stocks?
This possibility exists but does not seem to occur at present. As we have seen, the correlation between stocks and cryptocurrencies is positive, which is why stocks and cryptocurrencies tend to follow the same direction.
Additionally, we have seen how both segments of the market have reacted to this week’s US CPI numbers. Stocks and cryptocurrencies fell sharply, but cryptocurrencies appeared more sensitive to fundamentals than stock markets.
Consequently, we saw a 12% drop in Bitcoin and Ethereum, while stock indices fell 4-7%.
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