Friday, October 7, 2022

How Does Cryptocurrency Affect The Stock Market

Impact Of The Government On Cryptocurrency

Stock Market Downturn, How Does The Market Volatility Affect Bitcoin and Cryptocurrency?

Cryptocurrencies remain controversial. Many investors and billionaires have voiced out their concerns over the digital asset.

Bill Gates, the former CEO and co-founder of Microsoft , warned of investing in Cryptocurrency. In a recent interview with the New York Times, Bill Gate said Bitcoin consumes more electricity per transaction than any other method known to mankind and thus has a serious negative impact on climate.

Many Central Banks and global regulators are also skeptical of the digital currency.

The Bank of England warned against the Cryptocurrency on account of their volatility and vulnerability to theft and hacking. The lack of central authority and regulations is the primary reason governments are afraid of the digital currency.

The U.S. Treasury Secretary Janet Yellen and European Central Bank President Christine Lagarde have also sounded the alarm about the use of Bitcoin for money laundering, terrorist financing and other fraudulent activities.

In India, the government is considering a law that would ban and penalize anyone holding or trading them.

Recently, Bitcoin fell from $63,000 to $55,000 when news broke out that the Turkish central bank issued a ban on the use of Cryptocurrency as a payment method in Turkey. The decision to ban Cryptocurrency was due to the rising number of Cryptocurrency asset users within the country. This news causes a drastic depreciation of all Cryptocurrency.

How Does Proof Of Stake Work

The proof-of-stake model allows owners of a cryptocurrency to stake coins and create their own validator nodes. Staking is when you pledge your coins to be used for verifying transactions. Your coins are locked up while you stake them, but you can unstake them if you want to trade them.

When a block of transactions is ready to be processed, the cryptocurrency’s proof-of-stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate. If so, they add the block to the blockchain and receive crypto rewards for their contribution. However, if a validator proposes adding a block with inaccurate information, they lose some of their staked holdings as a penalty.

As an example, let’s look at how this works with Cardano , a major cryptocurrency that uses proof of stake.

Anyone who owns Cardano can stake it and set up their own validator node. When Cardano needs to verify blocks of transactions, its Ouroboros protocol selects a validator. The validator checks the block, adds it, and receives more Cardano for their trouble.

Does Crypto Follow The Stock Market

No, it does not. Even as their connections within the overall economy have increased and stand to keep doing so, crypto in no way follows the stock market. Trading in crypto operates completely within its own marketplace. Imagine there are two countries next to each other that speak the same language:

  • They communicate.
  • They engage in economic activity together.
  • There is probably some sort of historical bond connecting their two cultures, making them more similar than they are different.
  • They have similar governments and their social values are mostly the same.
  • A lot of people hold dual citizenships and families are on both sides of the border.
  • Their laws are similar
  • However, they have two separate, sovereign governments. One country in no way has control over the other.

That is the essence of the relationship between cryptocurrency and the stock market their relationship is just like those two countries. To put it in those same terms:

Thus, even though crypto and stocks share some characteristics and discussions around both sound the same, their trends are not correlated. So crypto certainly does not follow the trends of the stock market, even though it is not immune to its effects.

One small but noteworthy difference between the two, before we go on: since crypto is not tied directly to the stock market, it is not beholden to its Mon-Fri 9:30 am to 4:00 pm EST schedule. You can trade crypto any time you want.

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Reframing The Dollar Standard

Since the dollar is the strongest currency globally, it has long been a reserve currency for various countries. It forms the backbone of the global financial markets. Any change in the positioning of the dollar could severely impact financial markets across the world.

With the increased popularity of cryptocurrencies, the dollars position is under threat. Due to the decentralized nature of blockchain technology, cryptocurrencies are easily accessible. Additionally, transactions are faster than ever. This has motivated businesses to swap their dollar investments for crypto investments. Cryptocurrencies potential for scalability will further speed up the process.

When cryptocurrencies replace US dollars, the value of the fiat currency will fall dramatically. In the event that the US dollar was dethroned, global financial markets would panic as they all use US dollars as a reserve currency.

What Does Crypto Market Cap Mean For Investors

How Does Cryptocurrency Affect The Stock Market / How Will ...

In the stock market, knowing a companys market capitalization classifies it into an investment category: small cap, mid-cap, or large-cap. An investor might choose to divide their investment into these groups for different reasons, so knowing market cap is important. Market cap is often used to refer to how much a company is worth, and this value can be reflected in how risky it is to invest in the company. Large-cap stocks are often less risky, but slower-growing than mid- or small-cap stocks.

However, cryptocurrency is new. So new, in fact, that these types of categories havent yet been formed. And since experts say you should stick to Bitcoin and Ethereum, and not let crypto represent more than 5% of your total portfolio, there is less need to use market cap in determining investment decisions.

Knowing cryptocurrency market cap might be interesting if you wish to know the scope or potential of a certain token, but it shouldnt be as big a factor with your investing decisions as it might be in the stock market. With crypto, Its very important to recognize that its completely different from the stock market, says , the personal finance expert behind Investing Latina on Instagram. Its a completely different world.

While market capitalization has a more limited application with crypto investing, there is one way it can potentially help guide the way you invest in Bitcoin and Ethereum.

Also Check: How To Trade Bitcoin On Coinbase

Find A Regulated Broker

Do your research before you choose a broker to trade crypto CFDs. Make sure you have a regulated broker! Consider exchange, trade, and deposit-withdrawal fees to make sure you have enough capital to start investing. Also, check if your broker specialises in other assets to help you diversify your portfolio.

Impact Of Whales On The Market

The activity of whales can have a major impact on the cryptocurrency markets, including individual crypto prices and . When whales make trades, they often do it for tens, or even hundreds of millions of dollars. These massive sell or buy orders can lead to sudden and significant price changes. When a massive buy order is placed, it can move the price of a specific cryptocurrency way up because it sends a signal to the market that the particular asset is in higher demand.

When whales create a massive sell order, the price can go in the exact opposite direction because it sends the opposite signal to the market and causes the asset to look like it is being unloaded. Basically, when whales make major buys or sells, they can influence the market which then causes a cascade of buy or sell orders.

It is estimated that approximately 40% of all of the Bitcoins are held by roughly 1000 people. With so few people holding almost a majority of BTC, any significant buy or sell from these giant investors could tip the Bitcoin market in either direction.

Also Check: How To Transfer Crypto To Usd

How To Use Cryptocurrency For Secure Purchases

Using crypto to securely make purchases depends on what youre trying to buy. If youd like to spend cryptocurrency at a retailer that doesnt accept it directly, you can use a cryptocurrency debit card, like BitPay, in the U.S.

If youre trying to pay a person or retailer who accepts cryptocurrency, youll need a cryptocurrency wallet, which is a software program that interacts with the blockchain and allows users to send and receive cryptocurrency.

To transfer money from your wallet, you can scan the QR code of your recipient or enter their wallet address manually. Some services make this easier by allowing you to enter a phone number or select a contact from your phone. Keep in mind that transactions are not instantaneous as they must be validated using proof of work or proof of stake. Depending on the cryptocurrency, this may take between 10 minutes and two hours.

This lag time, though, is part of what makes crypto transactions secure. A bad actor trying to alter a transaction wont have the proper software keys, which means the network will reject the transaction. The network also polices and prevents double spending, Zeiler says.

Interesting But Where Do We Go From Here

How Might a Cryptocurrency Crash Affect the Market?

The last few months have been a wild ride for the entire crypto world as prices retracted from the end of last year. It is only natural that a correction occurs, as this could potentially leave room for healthier price action going forward.

Although recent events in the financial world suggest that stock markets can have a profound effect over the cryptocurrency space, there needs to be much more supporting evidence before this claim can be substantiated.

In general, 2018 could be dominated by new regulatory developments from governments around the world, as the major cryptocurrencies become even more mainstream. The truth is that no one can really tell for sure what the outcome will be, but the reality is that cryptocurrencies are here and they are already disrupting trillion-dollar industries, with the potential to innovate and to transform the financial world in its entirety.

Also Check: How Can You Sell Bitcoin For Cash

How Crypto Is Used

Crypto-assets were first developed as a digital form of currency, to be used as money. Some stores accept crypto as payment for goods and services, and some ATMs let you withdraw it as physical money. However, crypto is not legal tender in Australia and is not widely accepted as payment.

Crypto is more commonly used as a speculative, longer-term investment, as most people dont access their balance for everyday transactions.

Will Bitcoins Price Increase

As Bitcoin nears its maximum limit, demand for its cryptocurrency is supposed to increase. The increased demand and limited supply push the price for a single bitcoin higher. Also, more institutions are investing in Bitcoin, stabilizing its markets and making it popular as an investing tool. If bitcoin cryptocurrency becomes popular as a tool for retail transactions, its utility and price will also increase.

Recommended Reading: What Is The Value Of Bitcoin

Impact Of Cryptocurrency On Stock Market

    Cryptocurrency or Crypto has dominated the world and has become a major talking point globally after rising in value by 450% in the last six months.

    The most popular cryptocurrency, Bitcoin , has more than doubled since the beginning of 2021 when it reached $20,000 in December 2020 from $7,000 in April 2020. Currently, Bitcoin is valued at around $60,000 after hitting a record high of $63,000. It has been forecasted by many financial analysts to be worth $100,000 before the end of 2021.

    Ethereum , the second most valuable Cryptocurrency after Bitcoin, has also risen in value, reaching its record high of $2,205.

    One of the main reasons why Cryptocurrency grew spontaneously is the fact that it is independent of any governing bodies such as Central Banks before a transaction is verified. Therefore, such digital currencies serve as a perfect alternative to national currencies because of their decentralized network system, using peer-peer payment network that operates on blockchain technology.

    Below is a list of trusted platforms and their links where investors can purchase cryptocurrency from Binance, Coinbase,, Gemini,, Etoro, Kraken, Holdlnaut, Luno.

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    The Consequences Of Interdependence

    How Does Cryptocurrency Affect The Stock Market

    If this interdependence between cryptocurrencies and stocks can be established, what do the consequences look like?

    In a nutshell, crypto will abide by all laws and regulations that are panned out by the movement of traditional markets. If it follows the same path, its popularity is likely to take a hit. Because the promise of crypto holds the idea of independence central to it, falling prey to the same centralized financial structures can bring about a crushing blow to this short-lived affair.

    But, at the same time, there is an inevitable silver-lining for crypto enthusiasts. The correlation between traditional market assets like stocks and crypto will bring the shrouded currency to the global economic mainstream, which will add to its refinement and maturity.

    When the crypto assets take an annual turn in the global trading ecosystem, they are more likely to achieve stability and strengthen the institutional guarantees of the currency bringing in more lucrative investors.

    Recommended Reading: How To Do Cryptocurrency Taxes

    Can A Relationship Between Cryptocurrency And Stock Trading Be Established

    The foundational principle of Cryptocurrency was this: financial transactions needed to be free from third-party snooping such as central banks. This is the very reason that the price and volatility of crypto sources such as Bitcoin operated independently to those of traditional financial assets such as stocks. The crypto infrastructure exists separately, but things are much more complicated than this seemingly simple statement.

    Although cryptocurrencies existed independently of economic indicators and speculation, it still operated under the most fundamental aspect of any economic entity: the legendary law of supply and demand. Cryptocurrency and all its derivatives were still controlled by the demand stipulated in financial markets, and this brought it closer to the traditional stock exchange via the BTC/USD trading tool. Traders from all around the world such as those working with saw a lucrative opportunity to place their trades in this currency pair, soon a domino effect was set in place, one that was riled with speculators and currency bubbles that added to the volatility of cryptocurrency.

    What started out as a beautiful journey of financial independence for Crypto soon translated into manipulation and control by traditional trading tools such as the stock exchange.

    Cryptocurrency Trading & Volatility

    Whether you choose a crypto CFD or an exchange, do not forget that cryptos are extremely volatile. As a result, cryptocurrencies are often traded in smaller lots.

    Here we should note that cryptocurrency volatility is driven mainly by speculation and media. As cryptos are not backed by any physical asset or regulatory bodies, price movements are determined by supply and demand, with small changes exercising enormous effects on prices.

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    What Does Market Cap Depend On

    When it comes to cryptocurrencies, market capitalization is entirely dependent on changes in the exchange rate and the activity of market players. The total amount of crypto remains pretty much unchanged.

    Given the fact that the capitalization of cryptocurrencies depends on exchange rate, we can say that the level of demand also affects it. The more actively people are interested in a particular digital currency, the higher are its value and capitalization. In particular, the cost of crypto assets is defined by such aspects as:

    • activity of large players on exchanges
    • innovative technologies in the field of crypto
    • opinions of authoritative people, conclusions of analysts, experts, financial influencers, etc
    • regulations that govern the status of Bitcoin and other cryptos
    • news regarding virtual coins.

    Gold The Worlds Backstop

    Will The Cryptocurrency Crash Affect The Stock Market?

    Much is said about golds role as a bastion of safety in tumultuous times. Gold is always in demand, or so conventional wisdom goes. At least, the supply of gold changes relatively slowly, so if demand remains similar, the price will remain similar. That is one reason prices skyrocket during expected downturns: the demand spikes on the anticipation of the downturn and money floods into the gold market.

    So if rising interest rates mean lower earnings, stock prices, and bond prices, what happens to gold? Thats dependent on whats happening in the economy.

    If interest rates are rising due to strong economic growth, that means stocks will continue to grow and bonds will yield more returns. Investors buy gold for many reasons, but safe-haven status is one of the most prominent. That safe-haven status does not carry an expectation of capital appreciation it only carries an expectation that capital wont depreciation significantly. So when other investments are yielding more likely and higher returns, investors move their capital out of gold to those other investments. The outflow of capital translates to higher supplies on the market and thus lower prices.

    Which way gold goes is not easily predictable from interest rates, with different trends arising through the last century. Golds valuation is less dependent on interest rates than stocks and certainly less dependent than bonds.

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    Etoro The Best Platform To Trade Cryptos

    eToro have proven themselves trustworthy within the crypto industry over many years we recommend you try them out.

    Virtual currencies are highly volatile. Your capital is at risk.

    Did you like our article What Is Cryptocurrency Trading & How Does It Work? Then please share it with anyone who might find it helpful.

    Please Remember: Cryptocurrencies are highly volatile. Your capital is at risk and Past performance is not an indication of future results.

    Does Crypto Affect The Stock Market

    When hardly anybody even knew what bitcoin was, that answer was pretty much a resounding no. But now it can, thanks to its:

    • Large marketplace ecosystem and its volatility
    • Increasing interconnections within the economy
    • Availability for use as a safe haven

    We have already covered the safe haven stuff, but lets go over those other two points a bit more.

    Also Check: How To Make Purchases With Bitcoin

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