There is a growing correlation between virtual assets and financial markets. Prior to the pandemic, cryptocurrency assets such as bitcoin and ethereum had little correlation with major equity indices. However, this changed in the wake of the extraordinary central bank response to the crisis in early 2020. Both cryptocurrency prices and U.S. equities soared amid an easing global financial environment and increased investor risk appetite.
Ether, the largest cottage coin and second largest cryptocurrency, follows the same path as that covered by U.S. stocks. A report published by Bloomberg discusses the same topic. The chart below reveals the trajectory of the largest cryptocurrency compared to the stock market (S&P 500 index).
“The 40-day correlation coefficient between the tokens and the S&P 500 has exceeded 0.65, with 1 being the highest possible reading.”
Bitcoin, the largest cryptocurrency witnessed a similar path. Its correlation with stocks has reached record levels in recent days. Therefore, this suggests that the digital asset could rally with any rise in stock prices.
According to the report, the executives claim that
“The 40-day correlation coefficient between digital tokens and the tech-heavy Nasdaq 100 has approached 0.66 – the highest in data compiled by Bloomberg since 2010 – and a similar correlation with the S&P 500 Index has also reached a record high for a similar correlation.”
As a result, Bitcoin mirrored the U.S. stock market to an unprecedented degree. Nonetheless, both setups witnessed a plunge in digital assets (ETH, BTC) and the US stock market, but again an upturn on Wall Street could boost the battered digital tokens.
In fact, it will be the catalyst that helps BTC and ETH break through resistance levels. At the time of writing, both tokens are trading in the red zone. The former is below the $38,000 mark, with a new correction of 3.5%. The latter, however, is down 3%, trading below $27,000.
What about the International Monetary Fund?
The International Monetary Fund (IMF) has released a report alerting consumers to the risk narrative. The study raises "stability concerns" about the growing correlation between cryptocurrencies and stocks.
In a blog post, analysts at the International Monetary Fund noted that bitcoin and other cryptocurrency assets "have matured from an obscure asset class with few users to an integral part of the digital asset revolution." It further added that "cryptocurrency assets are no longer at the edge of the financial system."