Can Connection Between Cryptos And Stocks Hurt the Financial Industry World Wide?
It is no secret that cryptocurrency and stock markets often move in quite similar ways. This was even noticed in one analysis of losses and gains that were recorded in the last two years. However, according to some reports, any similarities between the two come not from any type of common ground or connection, but due to sentiment alone.
These two types of markets do have a tendency to perform similarly, that much is not being questioned. However, this was very unusual to a lot of analysts, considering that the crypto market lacks proper regulations, it is troubled by high volatility, and making profits by trading and investing is more of a gamble than a business.
This is why even Forbes itself conducted an analysis and has come to the conclusion that the long-term situation is quite different than what it may seem at first. Stock markets and cryptocurrencies actually have no relevant correlation, which can only mean that all similarities are there due to pure sentiment. While crypto markets may grow or drop in value after institutional investors enter or exit, happenings in stock markets have no effect on the crypto world.
How Did Cryptocurrency Attract So Much Attention?
Digital currencies have been around for almost a decade, but they only became a popular topic in recent years. In 2017, they came out of the shadows, and instead of being a small trend from the background, they took the stage as a new, revolutionary technology that will change the financial industry. In late 2017, Bitcoin itself grew to over $20,000 per coin, which turned it into one of the most valuable assets in the world.
The situation changed as soon as 2018 started, and Bitcoin dropped back to $6,400 per coin. While much lower than its all-time high, this new “bottom” is still much higher than the coin's value from a year ago. As soon as its price started growing, investors from all around the world rushed to join the new market and make a profit. Since that time, digital currencies became a symbol of change.
However, while many have rushed to join the trend, there are also many who still call cryptos a bubble and a scam. Even some of the most influential people believe them to be empty assets that have no real value. Even so, the number of investors interested in the new market continues to grow, and even some nations invested a lot into this space.
As a result, the cryptocurrency ecosystem currently counts over 2,000 digital currencies, most of which lack any form of governance, with decentralization and transparency being their focus. At first, the idea may sound tempting, but it already experiences numerous drawbacks and large issues. Theft and fraud, for example, are a common occurrence in the crypto world. And yet, there is no structure to be blamed for it.
While there are other issues that trouble the crypto world, it is believed that some refining of this technology may lead to a more productive environment.
Similarities Between The Crypto Market And Stock Market
In order to determine whether Bitcoin and stock markets actually have some sort of influence over each other, numerous institutions studied them and compared them. One such institution was Blockforce Capital, which recently announced its “Blockforce Analysis”. The analysis took a close look at BTC, as well as Standard & Poor's 500 Index. They gathered data from a three-year period, starting in January 2015 and ending in October 2018.
After the study ended, only a weak correlation between the markets was found, with the company's CEO, Eric Ervin, stating that it has been rather insignificant throughout the history of the two. Ervin also said that the correlation values between the two asset classes slightly grew this year, but only when compared to historical averages. Even so, it is still too small to have any kind of a serious impact at this time.
Will This Change In The Future?
The possibility of correlations growing in the future does exist, especially as more traditional investors decide to enter the crypto space. However, so far, nothing has happened to indicate that this is something that can actually be expected. All such talks are considered as nothing but sentiments and not facts.
If the correlation does grow, however, it is expected that cryptocurrencies might become less interesting to investors, since all of their current attraction comes from the lack of such correlation. On the other hand, it was proven that all correlation between the markets right now is based on nothing more than sentiments. Even so, this is not something that can be overlooked, as the sentiments represent the market's driving force.
The current situation in the world of finances is quite complex. Investment is among the biggest drivers of the global financial sector, and this was mostly done via the stock market. With cryptocurrencies entering the game, this balance was disturbed, and a new investment vehicle (however volatile) caught the curiosity of investors.
The issue of correlation between the markets has troubled analysts for some time, and even now, there are many asset managers that are dismissing the idea of such a correlation. The stock market is obviously a lot older and a lot more refined than crypto. However, cryptocurrencies are a new and experimental trend that uses sentiment to establish itself. While the correlation is basically non-existent right now, it is possible that this will not always be the case, which may lead to the stock market losing stability. If this happens, analysts expect serious consequences on the entire financial industry.