📚Market fundamentals: Bitcoin, S&P 500, and correlation

Hello! It's time to talk about serious things. Sometimes it is necessary to dive into the fundamental principles because it expands the horizon and gives you helpful information. So it is necessary to spend 10 minutes of your time reading a fascinating article about why crypto traders look at the stock market.

What is a correlation, and why do crypto investors/traders look at the stock market?

Investors, traders, and other crypto-enthusiasts use such terms as S&P 500. The S&P 500 becomes the discussion subject and maybe a powerful argument in a dispute. But in fact, not many people fully understand what they are talking about and what S&P 500 is.

And many say that Bitcoin repeats the S&P 500 flows. Often it's a primary reason for controversy and quarrel.

So what is S&P 500?

It needs to start not with the S&P 500 term but with the fact that many of us often forget or overlook:

Speculation is the action in a space that obeys defined economic rules. No matter what you trade - national currencies, stocks, crypto, or Martian dust, some things make all these markets equal.

As long as traders stay humans - there will be a psychology of trading, bullish and bearish moods, the market cycles, and other "irrational" factors.

Now, keeping this in mind, we can talk about the interconnectedness of markets, their similarities, and their differences.

S&P 500 definition

The concept of a «stock index» is not new for stock markets - It's the composite rate based on the selected companies' shares value. There are many indexes, but one of the most often used - is the S&P 500.

The S&P 500 is called the benchmark of the American economy. Index companies accumulate about 80% of the total capitalization of the US stock market. Therefore, it has a powerful impact on the global market.

The interconnectedness of Stock and Crypto

Now, when we know what means S&P 500 is and its importance in the stock market, we need to find a benchmark of the cryptomarket.

The correlation is the interaction of two assets and their reaction to each other flows. If we see that one asset price goes down, what is the price dynamic of another? If it is also on the downtrend, we can say those assets with a high correlation, and if price flows to uptrend, the correlation is low.

Using the correlation concept, we can look at how Bitcoin reacts to S&P 500 and conclude how much the crypto market is dependent or independent from the stock market, i.e., traditional assets.

S&P 500|BTC correlation

BTC existed for ~ 10 years, and you probably know it was launched, during the global crisis in 2009, as an alternative for «unreliable traditional financial assets».

Depending on market monitoring and analysis, now we can see that the correlation of Bitcoin with the stock market is cyclical. During the market recession, price flows it's highly similar, but in recovery periods, it becomes different.

Proof of this was the COVID pandemic which dramatically dropped both the crypto and the stock markets. In such moments, panic is high, and assets are sold off due to uncertainty in the long term, as you can see there:

Actually, correlation is not a weakness of BTC. It means that the crypto market reaches such huge recognition that it obeys the fundamental economic rules. If in the crisis of 2009, cryptocurrencies were a topic for geeks and finance freaks, now institutional capital that has a long time invested in the S&P 500 is interested in the crypto market.