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How Are Cryptocurrency and Stocks Connected?

How Are Cryptocurrency and Stocks Connected?
Updated:
June 11, 2023
By
Liam Langers

As the world becomes increasingly digitized, it's no surprise that how we think about and interact with money is also evolving.

Cryptocurrency, a digital asset that uses cryptography for secure financial transactions, has exploded in popularity recently, with Bitcoin, the most well-known cryptocurrency, reaching an all-time high of nearly $65,000 in April 2021.

But how is cryptocurrency connected to the traditional stock market? And what does this mean for investors?

In this blog post, we'll explore how cryptocurrency has impacted the stock market, the potential risks and opportunities of investing in cryptocurrency, and examples of how investors have incorporated cryptocurrency into their portfolios.

The Rise of Cryptocurrency

Before we delve into the connection between cryptocurrency and the stock market, it's essential to understand the basics of cryptocurrency.

Cryptocurrencies are digital or virtual currencies that use cryptography for secure financial transactions.

They are decentralized, meaning they are not controlled by any government or financial institution.

Instead, they are underpinned by a network of computers worldwide that work together to verify and record transactions.

The first and most well-known cryptocurrency is Bitcoin, created in 2009 by an unknown individual or group using the pseudonym Satoshi Nakamoto.

Since then, thousands of other cryptocurrencies have been created, with varying degrees of success. Some of the other well-known cryptocurrencies include Ethereum, Litecoin, and Dogecoin.

Read this review about Binance (Crypto Exchange)
Read this review about Binance (Crypto Exchange)

The Impact of Cryptocurrency on the Stock Market

So, how has cryptocurrency impacted the traditional stock market?

One way is to create cryptocurrency-based financial products, such as Bitcoin futures and exchange-traded funds (ETFs).

Cryptocurrency Futures

In December 2017, the Chicago Board Options Exchange (CBOE) became the first major exchange to offer Bitcoin futures, allowing investors to speculate on the future price of Bitcoin.

Since then, other exchanges, such as the Chicago Mercantile Exchange (CME), have also begun offering Bitcoin futures.

Futures contracts are a type of derivative that allows investors to buy or sell an asset at a predetermined price on a future date.

By offering Bitcoin futures, exchanges have made it easier for traditional stock market investors to access the cryptocurrency market and speculate on the future price of Bitcoin.

Cryptocurrency ETFs

In addition to futures, Bitcoin ETFs have also been introduced, allowing investors to buy into a fund that tracks the price of Bitcoin without directly purchasing the cryptocurrency.

The Ontario Securities Commission approved the first Bitcoin ETF in February 2021, and several others have been approved in Canada and Europe.

However, the US Securities and Exchange Commission (SEC) has been hesitant to approve a Bitcoin ETF, citing market manipulation and investor protection concerns.

ETFs are a type of investment fund that tracks the performance of a particular index or asset class, such as the S&P 500 or gold.

By offering Bitcoin ETFs, investors can gain exposure to cryptocurrency through a more traditional investment vehicle.

Introducing these financial products has helped bring more mainstream attention to cryptocurrency and made it easier for traditional stock market investors to access the market.

However, it's worth noting that cryptocurrency-based financial products come with their risks, such as the potential for losses due to the volatility of the cryptocurrency market and the lack of regulation in some cases.

Read this review about Coinbase (Payment Solution & Exchange)
Read this review about Coinbase (Payment Solution & Exchange)

The Adoption of Blockchain Technology

Another way cryptocurrency has impacted the stock market is through traditional firms' adoption of blockchain technology.

Blockchain is the technology that underlies cryptocurrencies and allows for secure, decentralized financial transactions.

Many traditional firms, such as banks and supply chain companies, have begun exploring using blockchain technology to improve operations and reduce costs.

For example, the Bank of America has filed over 50 patents related to blockchain technology, and Walmart has used blockchain to track its pork supply chain in China.

The adoption of blockchain technology by traditional firms has led to the creation of new investment opportunities in the form of blockchain-based stocks.

These stocks are tied to companies that are developing or using blockchain technology in some way.

For example, the Global X Blockchain ETF tracks the performance of companies "poised to benefit from the adoption of blockchain technology."

Investing in blockchain-based stocks can provide a more indirect exposure to the cryptocurrency market and may be a good option for those who are more risk-averse.

However, it's essential to carefully research and understand these stocks' specific risks and potential rewards before investing.

Read this review about Exmo (Crypto Exchange)
Read this review about Exmo (Crypto Exchange)

Risks and Opportunities of Investing in Cryptocurrency

As with any investment, there are risks and opportunities to consider when investing in cryptocurrency.

Risks of Cryptocurrency Investing

One risk to consider is the volatility of the cryptocurrency market.

Cryptocurrencies are known for their wild price swings, with Bitcoin experiencing several major price crashes in its short history.

For example, in December 2017, the price of Bitcoin reached nearly $20,000, only to crash to under $4,000 just a year later.

This volatility can make it difficult for investors to predict cryptocurrency’s price accurately and lead to significant losses if the market doesn't favor them.

Another risk to consider is the lack of regulation in the cryptocurrency market.

Because cryptocurrency is a relatively new and decentralized asset class, it is not subject to the same level of regulation as the traditional stock market.

This can make it more difficult for investors to protect their assets and can increase the risk of fraud or market manipulation.

Opportunities of Cryptocurrency Investing

Despite these risks, there are also several opportunities that cryptocurrency investing can offer.

One potential opportunity is the ability to diversify your portfolio.

Because the cryptocurrency market is not directly correlated with the traditional stock market, investing in cryptocurrency can help to spread risk and reduce the overall volatility of your portfolio.

Another opportunity is the potential for high returns.

While the cryptocurrency market is known for its volatility, it has also seen some impressive gains in recent years.

For example, Bitcoin has returned over 9,000% since its inception in 2009.

While it's important to remember that past performance is not indicative of future results, these returns can be tempting for investors looking to maximize their profits.

Balancing Risk and Reward

It's essential for investors to carefully consider their investment goals and risk tolerance before incorporating cryptocurrency into their portfolio.

While the potential for high returns may be tempting, it's also important to remember that investing in cryptocurrency carries its unique risks.

Therefore, starting with a small portion of your portfolio may be a good idea and gradually increasing your exposure as you become more comfortable with the market.

Seeking the advice of a financial professional can also help develop a personalized investment plan that considers your individual needs and goals.

Read this review about KuCoin (Crypto Exchange)
Read this review about KuCoin (Crypto Exchange)

Incorporating Cryptocurrency into Your Portfolio

So, how can investors incorporate cryptocurrency into their portfolios?

One way is to purchase cryptocurrency directly through a cryptocurrency exchange or a Bitcoin ATM.

However, as mentioned previously, this approach carries the risk of significant losses due to market volatility.

Another option is to invest in cryptocurrency-based financial products, such as Bitcoin futures or ETFs.

As mentioned earlier, these products can expose investors to the cryptocurrency market without needing to purchase the cryptocurrency directly.

However, it's essential to carefully research and understand the risks and fees associated with these products before investing.

Finally, investors can also consider investing in blockchain-based stocks, which are tied to companies developing or using blockchain technology.

This can provide more indirect exposure to the cryptocurrency market and may be a good option for those who are more risk-averse.

Regardless of the approach, it's crucial for investors to carefully consider their investment goals and risk tolerance before incorporating cryptocurrency into their portfolio.

It's also a good idea to seek the advice of a financial professional to help develop a personalized investment plan.

Read this review about xCoins (Crypto Exchange)
Read this review about xCoins (Crypto Exchange)

Conclusion

In conclusion, cryptocurrency and the stock market are connected in several ways, including through the creation of cryptocurrency-based financial products, the adoption of blockchain technology by traditional firms, and the potential for cryptocurrency to hedge against market volatility.

However, cryptocurrency investing comes with risks, including volatility and lack of regulation.

Therefore, investors should consider these risks and opportunities carefully and determine the best approach for incorporating cryptocurrency into their portfolio based on their individual investment goals and risk tolerance.