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The Correlation between the Cryptocurrency Market and the Stock Market

“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.”

Thomas Carper, US-Senator

Today cryptocurrencies have become a global phenomenon known to most people. While still somehow geeky and not understood by most people, banks, governments and many companies are aware of its importance.

The unrivaled, the first and most acclaimed digital money. Bitcoin fills in as a computerized highest quality level in the entire digital money industry, is utilized as a worldwide method for installment and is the accepted cash of digital wrongdoing like darknet markets or ransomware.

Following seven years in presence, Bitcoin's cost has expanded from zero to in excess of 650 Dollar, and its exchange volume achieved in excess of 200.000 day by day exchanges.

Mostly due to its revolutionary properties cryptocurrencies have become a success, their inventor Satoshi Nakamoto, didn‘t dare to dream of it. While every other attempt to create a digital cash system didn‘t attract a critical mass of users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it feels more like religion than technology. Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity.

The market of digital currencies is quick and wild. Almost consistently new cryptographic forms of money develop, old kick the bucket, early adopters get rich and financial specialists lose cash. Each cryptographic money accompanies a guarantee, for the most part, an issue on everyone's mind to turn the world around. Hardly any survive the principal months, and most are pumped and dumped by theorists and live on as zombie coins until the last bagholder loses trust ever to see an arrival on his venture.

Now to analyse the correlation between the S&P stock market and Citcoin we need to anaylse their Z-scores as depicted in Figure 1.

Figure 1, source: CBOE – Russel Rhoads, 2017

For those unaware VIX is an index of the volatility in the stock market and is also referred to as the “fear-gauge”. This means that there is a definite inverse correlation between VIX and Bitcoin. The S&P 500 has a “weak negative relationship” to Bitcoin. This is an extremely interesting find. If true, it means that as fear in markets decreases bitcoins price increase. Conversely, as fear increases bitcoins prices decrease. This makes Bitcoin a risk-on investment as opposed to more conservative investments like gold which are considered risk-off investments. It also tells us that in a longer-term bear stock market cryptocurrencies will likely fare even more poorly than their stock counterparts. Conversely, in a bullish market, they will likely fair better.

Perhaps for now the idea of correlation between the Bitcoin market and that of traditional stocks is limited to the “fear index” because of cryptocurrency buzz in 2017 and the bull rally of investors. They cannot truly be plotted on a graph against one another, and have often deviated at key moments. For example, In August last year, the global economy took a major hit in the face of rising tensions between the US and North Korea, but the Bitcoin market remained unfazed. But what could be concluded from this recent pattern across the markets is that investor sentiment can carry over from the stock market to the Bitcoin market. Because of a mainstream adoption wave that has seen Bitcoin accepted as an investable asset, there is the beginnings of a crossover. Thus, when fear and risk enters the stock market for reasons outlines by John Wasik then the VIX also starts to rise. It has been shown that there is an inverse correlation between this and the price of Bitcoin which can be seen on an overlapping graph. None of these relationships or correlations, tenuous as they are, can really aid in predicting the markets, they can only prove that investment fear is not just isolated to the stocks.

In a nutshell, ICOs will have no material impact on the securities markets (except may be on its technology which currently is legacy and is crying for a change to a better technology like Blockchain). The securities markets have withstood lots of ups and downs and stood their ground. They are not going anywhere anytime soon.

"Cryptocurrencies have their own economy based on activity on that Blockchain. Equities have their own economy based on earnings per share multiples. The institutional overlap is essentially zero."

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