COVID-19, US Monetary Policy, and Bitcoin’s Correlation with the Stock Market
In early 2020, Bitcoin price fluctuations, once independent, began mirroring Wall Street’s volatility as the COVID-19 pandemic accelerated its integration into traditional markets, raising questions about its future as a hedge or speculative asset.
The COVID-19 pandemic transformed financial markets to place Bitcoin and traditional Wall Street assets in previously unseen sync. It was once defined as a decentralized substitute for traditional investments, but Bitcoin price fluctuation has now more closely tracked stock market trends, particularly of the Standard & Poor’s (S&P) 500 and Nasdaq. Economic uncertainty brought about by the pandemic propelled the use of Bitcoin as a hedge and investment asset, hence challenging its status as an independent entity from Wall Street and the broader financial system.
Bitcoin and Stock Market Correlation
Previously, Bitcoin price affected by USD currency fluctuations was a non-correlated virtual currency that appealed to those seeking an alternative to traditional financial markets. It evolved in its correlation, however, once institutional investors entered the crypto universe. Hedge funds and large firms began treating Bitcoin like stocks, buying and selling it by macroeconomic forces rather than its historical function as a decentralized money.
Throughout the COVID-19 pandemic, Bitcoin daily price fluctuations began to mirror that of the traditional equities. Investors, who were not certain of economic stability, turned to both Bitcoin and gold as a place of safety. While gold has been a safe-haven asset for many years, Bitcoin’s increased correlation with the stock market resulted in volatility comparable to equities.
“Financial markets have been viewed to have played a significant role in the country’s development due to their functions primarily in bridging the gap between those who need capital with those who have capital to invest,” highlighting the significance of stable investment instruments.
Pandemic-Driven Market Shifts
The global financial crisis at the start of 2020 prompted violent declines on stock exchanges. Bitcoin price fluctuations initially obliged but rebounded more aggressively. Institutional investors came to see its potential, using it as a speculative instrument and as a portfolio diversifier. Stimulus measures by the American government and Federal Reserve policy pumped money into financial markets, spurring risk-on sentiment. Bitcoin benefited from the ride, further linking its fate with Wall Street.
Studies have indicated that Bitcoin price fluctuation reason does not have a very high cross-correlation with other cryptocurrencies, particularly during periods of financial uncertainty. This means that, despite its own unique volatility characteristics, Bitcoin actually acts more like traditional investments.
The Future of Bitcoin and Wall Street
The long-term implications of the Bitcoin share price fluctuation onto Wall Street remains to be seen. If Bitcoin price fluctuations persist in behaving like a tech stock, its ability to function as a financial safe haven could also fade. If institutional investors persist in refusing to sell their crypto longs during downturns, however, Bitcoin can potentially solidify its position as a hybrid asset—a specimen that shares traits of both speculative equities and digital reserve currency.
Lastly, the destiny of comparison of bitcoin price fluctuations with gold is dependent upon market sentiment, regulatory news, and macroeconomic cycles. Despite improving ties with Wall Street in the post-pandemic times, whether it will keep up with traditional financial cycles or diverge is yet to be seen.
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