At the end of September, an intriguing phenomenon emerged in the crypto market: the correlation between Bitcoin and the U.S. stock market reached its highest level in two years, only surpassed by the second quarter of 2022.

As the crypto market matures, the relationship between cryptocurrencies and the stock market has become increasingly intertwined. The correlation between Bitcoin and the S&P 500 index has steadily risen, now reaching 0.75. These two originally independent asset classes are showing signs of synchronization under certain financial conditions. This article will analyze the growing relationship between the crypto market and the stock market and explore the driving factors behind it.

The Increasing Overlap Between Cryptocurrencies and the Stock Market

Although cryptocurrencies and stocks are fundamentally different, one is a financial product based on blockchain technology, the other represents ownership in a company—their relationship is becoming increasingly complex, especially during periods of economic turbulence.
For example, Japan’s recent interest rate cut led to a collapse in the Japanese stock market, which quickly rippled through global stock markets, dragging down the crypto market as well. Mainstream cryptocurrencies like Bitcoin and Ethereum took heavy hits. Within just 24 hours, Bitcoin’s price plummeted by 17%, dropping from a high of $70,000 to around $50,000, while Ethereum dropped by 23%, hitting a new market low. The total market value of cryptocurrencies shrank by more than $1.04 billion in a single day, shaking investor confidence and triggering a wave of panic selling.

Reasons for the Interconnection Between the Crypto Market and the Stock Market

1. Changes in the Global Macroeconomic Environment
   The global macroeconomic environment is one of the core drivers behind the increasing correlation between the crypto market and the stock market. Inflation pressure and rising interest rates have led global investors to adopt similar strategies in response to uncertainty. For instance, when inflation expectations rise, investors tend to shift to assets with anti-inflationary characteristics, such as simultaneously increasing their holdings of stocks and Bitcoin to hedge against currency depreciation.
   Bitcoin is gradually being recognized as “digital gold” due to its limited supply and decentralized nature, which makes it perceived as a value-preserving asset during volatile economic conditions. Meanwhile, in the stock market, investors usually opt for relatively stable industries or company stocks, particularly tech stocks, as these companies tend to have stronger risk resistance during uncertain times. As a result, when global economic pressure mounts, investors tend to choose both cryptocurrencies and traditional stocks as safe-haven assets, leading to synchronized price movements.
2. Transmission of Market Sentiment
   The shift in market sentiment has acted as a bridge between cryptocurrencies and the stock market, promoting price synchronization between the two. When market sentiment is optimistic, investors’ risk appetite increases, prompting them to flood into both the crypto and stock markets, pushing prices higher. Conversely, when market sentiment turns negative, investors tend to sell off high-risk assets, leading to simultaneous declines in both markets.
   For example, during the 2022 Russia-Ukraine conflict, global markets were gripped by fear, and investors quickly withdrew from riskier assets, causing both the crypto and stock markets to plunge. This transmission of sentiment has strengthened the correlation between cryptocurrencies and the stock market. As a result, cryptocurrencies like Bitcoin are no longer viewed as standalone alternative investments, but are increasingly seen as part of the broader financial market’s volatility.
3. Impact of Global Liquidity
   Global liquidity conditions play a direct role in influencing the correlation between the crypto and stock markets. In a liquidity-rich environment, capital flows more freely between different asset classes, resulting in more synchronized price movements. For example, during the large-scale quantitative easing programs of 2020 and 2021, massive amounts of capital were injected into markets, fueling not only a sharp rise in stocks but also a rapid surge in the crypto market.
   The simultaneous rise of Bitcoin and the S&P 500 index is a typical example. When global capital flows are abundant, investors often increase their exposure to both asset classes, driving their prices up together. Conversely, when global liquidity tightens—particularly when central banks raise interest rates—capital flows out of high-risk assets, leading to a simultaneous decline in both the crypto and stock markets. The earlier plunge caused by Japan’s interest rate hike is a perfect example of this.

Core Differences

Despite the increasing correlation between cryptocurrencies and the stock market in recent years, there are still significant fundamental differences between them:

1. Asset Nature
   Cryptocurrencies are decentralized assets based on blockchain technology, with their value mainly determined by supply and demand, and they do not represent ownership of any entity. The scarcity and decentralized nature of assets like Bitcoin make them different from any traditional asset. By contrast, stocks represent partial ownership in a company, and investors holding stocks enjoy certain decision-making rights and dividend payouts. A stock’s value is influenced not only by market sentiment but also by a company’s operational performance, profits, and industry outlook.
   This fundamental difference means that cryptocurrency price fluctuations are more influenced by market sentiment and speculation, while stocks are driven by more tangible factors, such as the performance of real-world companies. Therefore, even though they may exhibit similar behaviors in certain macroeconomic environments, their long-term trends and risk structures differ greatly.
2. Trading Mechanism
   A distinguishing feature of the crypto market is its 24/7, round-the-clock trading mechanism, with no time restrictions. Investors can buy and sell at any time, leading to greater volatility and higher trading frequency compared to traditional markets. On the other hand, the stock market has fixed trading hours, typically only open during certain business hours on weekdays. While these set hours limit short-term price fluctuations, they also prevent investors from reacting immediately to sudden market changes.
   This difference in trading mechanisms leads to significant distinctions in the volatility of the two markets. The high-frequency trading, short-term speculation, and open access of the crypto market make its price movements far more volatile than those in the stock market. Investors in cryptocurrencies must be prepared to handle higher risks and uncertainty.
3. Regulatory Framework
   The stock market has undergone years of development, resulting in a relatively well-established regulatory framework. Globally, various securities regulators strictly oversee the stock market to ensure fairness and transparency while protecting investors’ interests.
   In contrast, the regulatory framework for cryptocurrencies is still evolving, and standards vary widely across different countries. Although more countries are starting to introduce regulations for cryptocurrencies, issues such as fraud, hacking, and project failures still occur frequently, posing significant legal and security risks for investors.

The Inherent Volatility of the Crypto Market

As mentioned earlier, one important reason for the rise of both the crypto and stock markets is the improvement of macroeconomic conditions. However, when viewed from a more granular perspective, the narratives behind the growth of the crypto market and the stock market differ significantly. Take Bitcoin and the S&P 500, for example:
In March 2023, as rising interest rates shook the foundations of many U.S. banks, the S&P 500 experienced a sharp decline. Amid the collapse of Silvergate Bank, Signature Bank, and Silicon Valley Bank, caused by panic withdrawals from wealthy individuals and institutions, confidence in the current banking system dwindled. As a result, funds shifted toward the crypto market. To many traders, the decentralized nature of cryptocurrencies makes them a hedge against the fiat currency system, reducing the risk of capital loss. Therefore, Bitcoin became more attractive while the S&P 500 was falling.

Conclusion

Although cryptocurrencies and the stock market exhibit similar price correlation in response to macroeconomic conditions, they remain fundamentally different in terms of their narratives and trading mechanisms. For seasoned traditional financial traders who prioritize protection against fraud and scams, the stock market might be a safer bet. Conversely, crypto traders with an understanding of crypto market cycles and a strong risk management strategy might find the volatility of Bitcoin more appealing. Ultimately, the choice between these two asset classes depends on personal risk preferences and investment horizons.