The global economy is a medley of financial components that work in synchrony. The Crypto market is one such element that has only grown since 2009. However, at present, the stock market remains the jewel of global finance. The stock market is composed of constituents such as The Nasdaq and the New York Stock Exchange (NYSE). These entities allow for the trading of stocks and securities by investors around the world. Given the recent correlation between the crypto and stock markets, this explainer will expound on the two markets’ connection.
Two Peas in a Pod
In a bid to meet the needs of the population under the capitalistic system, modern society developed the market system. Under this system, investors could publicly buy or sell assets to each other. This system was incorporated into all levels of the economy after proving its effectiveness.
As a result of industrialization and the globalization of trade, a new class of assets emerged; stocks. These global assets allowed individuals from all over the world to purchase under governments’ regulation. Following the introduction of bitcoin, a more progressive type of asset dawned in the financial world; cryptos. While different in some ways, the two also hold some similarities that serve to connect them.
Stocks
These assets are a key part of the traditional finance system regulated by governments. Stocks allow individuals to own part of the company through ownership of shares. The entity’s features made them alluring to many investors around the world. These stocks are sold on exchanges; hence, they have become the primary foundation of many investors’ portfolios in the modern day.
Historically, stocks have showcased great long-term profitability and, to date, are regarded to be among the best investments. This outcome has led to many companies raising funds through the sale of shares to the public.
Cryptos
With the emergence of bitcoin in 2009, the world was introduced to cryptocurrencies. These tokens were created to be decentralized, efficient, and cheap for users who could purchase them from exchanges. Investors could buy and trade these virtual assets to earn short-term profits or hold them in wallets and wait for them to rise in value.
The crypto economy ballooned after many new investors joined the market and its ever-expanding projects. The growth saw many companies raise funding through these cryptos as investors also flocked to join in. This growth prompted institutional investors to begin taking crypto assets seriously. Governments have also moved to regulate cryptos worldwide as they become mainstream.
How Cryptos and Stocks Have a Big Connection
Despite being viewed as different kinds of assets, cryptos and stocks have become even more connected than before. This connection is large because of two factors; government intervention and trends made by companies.
Government Intervention
The government intervention with cryptos has seen many countries form regulations that resemble stock regulations. The move has led to many exchanges and having to be approved by governments worldwide. This action has brought cryptos closer to traditional financial institutions.
Originally, cryptos were designed to be autonomous and independent from traditional finance. However, as policies emerged and governments took action, the stance began to shift. Currently, many governments have made policies that manage digital assets similarly to stock markets regulation. By doing this, the risk posed by crypto volatility and money laundering has been reduced. This move has seen more institutional investors flock to the crypto market as cryptos become tied to traditional financial institutions. This move leaves the two financial components connected like never before.
Trends by Companies
A trend has emerged where top Nasdaq and NYSE companies own and dabble in cryptos. Due to the emergence of cryptos, many companies decided to use them to raise funding. Companies such as FalconX and Outland are perfect examples of the power of crypto in raising funds. Much like the issuance of stocks to the public, cryptos have thrived as the go-to funding method used by budding companies and their projects.
The entry of new companies into the crypto market has seen many having some crypto reserves as part of their assets. Companies like Tesla have reported owning bitcoin reserves worth approximately $ 1.5 billion. This trend has continued with many companies trading stocks also holding crypto assets.
This move has thus made crypto, and the publicly traded companies become joined at the hip. By having these ginormous crypto assets in store, the fates of crypto have become intertwined. As things stand, the trends by companies have made many publicly vulnerable to adverse outcomes that affect the stock market. This is evident in the Russia-Ukraine conflict’s repercussions on the crypto and stock markets.
Author’s Take
The correlation between the stock market and the crypto market is set to continue for the time being. Similarly, the trend of crypto becoming an asset for Nasdaq listed companies is set to continue. As more governments form and implement policies that tie down cryptos, this link between both markets will only solidify further. Thus, it is expected that cryptos will no longer be the decentralized phenom they once were. In the future, any investor should be prepared for the markets to be more connected.
Source: https://crypto.news/understanding-the-connection-between-the-crypto-and-stock-markets/