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The crypto market’s correlation with Gold and the Stock Market

We are also curious how long the DeFi craze will prop up the crypto market

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The crypto market has been making substantial gains this year. After the infamous flash crash back in early March, the crypto market has been slowly regaining its confidence back. Bitcoin has been flying higher, Ethereum has been doing even better, and many smaller cap coins, especially those related to Decentralized Finance (DeFI), have been doing tremendously well.

Read about how Decentralized Finance (DeFI) is replacing all traditional financial services

Many analysts and so-called experts are trying to connect the dots. Many of them try to see the reason behind this rally and if the rally will last for much longer.

While many believe that the rally has been directly caused by global financial instability and the COVID-19 pandemic, some others believe it’s more complicated than that. Well, it’s not hard to see why the crypto market is linked to the stock market and gold.

Since March 2020’s crash, the Stock Market has been influencing Crypto

crypto

Source: thetechnicaltraders.com

The chart above compares the price action of Dow Jones against Bitcoin. As you can see, they weren’t tightly correlated before March’s liquidity crisis. However, since then, both of them have been flying high. Bitcoin, especially, has been flying higher than before early March’s crash.

So, how is it possible? How were they not correlated before, but suddenly become tightly correlated? Well, it looks like most people are just looking for tightly correlated assets to predict their next move.

The liquidity crisis in March hit everybody with a big surprise. Since then, the Federal Reserve in the U.S. has been issuing stimulus packages to citizens. Both the stock and crypto market received big boosts from these stimulus packages.

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The problem with the stock market is fundamental. Outside the big tech, many companies are not doing that well in 2020. Their valuations are getting pumped only because everybody saw the pumps and decided to pump more. Many people believe that the stock market is in a huge bubble due to how obsolete they are with the real financial situation where everybody feels depressed.

So, here’s the million-dollar question. What’s going to happen to the crypto market if the stock market’s bubble pops? Will they go down together again, just like in March? Well, nobody knows, but if history has taught us anything, the correlation won’t last forever.

In 2018 the crypto market was very bearish while the stock market was doing well. We may have a reverse scenario in the future where the stock market goes down while crypto remains stable or keeps going up. Nobody knows.

How about Gold and Bitcoin?

Unlike the stock market, the gold market hasn’t been influencing Bitcoin until very recently. As you can see from the chart above, they often move independently from each other until very recently, when both of them have been going up a lot.

And when gold was dumped a while ago, Bitcoin price plummeted too. However, BTC made a quick recovery, while gold hasn’t. Still, it’s interesting to see BTC go down when gold was dumped from above $2000 to ~$1940.

For many years, crypto analysts have been stating that Bitcoin is “digital gold” due to their shared characteristics (i.e., being deflationary). Even though Bitcoin has not proven itself to be gold’s follower when it comes to price action, it might very well become one in the near future.

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If more and more people see the rise of BTC price in the future (and assuming gold can slowly go up in the same time period), there’s a possibility that many rich casuals outside the crypto market will pour their money into BTC.

In this case, BTC would be psychologically accepted as digital gold. Will that happen? I don’t know. But it has very good potential to happen.

In conclusion, it’s important to know that Bitcoin can be tightly correlated to either the stock market or gold.

Nevertheless, considering how flexible the crypto market is, we won’t be surprised if one day, BTC makes another independent trend (like 2018), not correlated to the gold price or stock market. We are also curious how long the DeFi craze will prop up the crypto market.

Find out more information about the increasing popularity of Decentralized finance (DeFi).

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