Why Bitcoin Could Be the Next Great Economic Indicator

Why Bitcoin Could Be the Next Great Economic Indicator

The relationship between cryptocurrencies and the rest of the economy hasn’t always been clear. For years, Bitcoin and other cryptocurrencies were simply too small to have any significant impact. Bitcoin price action was considerably detached from anything else, swinging up and down without apparent reason. However, today financial analysts are taking a closer look at the link between cryptocurrencies and other markets.

The Relative Size of Bitcoin and the Stock Market

Investors today have a wide range of potential investment opportunities, and cryptocurrencies and stocks are two of the most significant. Today, the global crypto market cap sits at $883 billion, significantly down from an all-time high of $3 trillion. The US stock market alone has a market cap of $48 trillion.

It’s clear that there’s a major gap between the two types of assets, with the US stock market alone being over 15 times the all-time high of crypto. However, the two markets are now on a similar scale, meaning there could be interactions back and forth. For most of Bitcoin’s lifetime, it was completely irrelevant to the wider investment landscape, but that simply isn’t the case anymore.

For a type of asset that’s less than 15 years old to come within throwing distance of the US stock market is something completely staggering. Just six years ago, the total crypto market cap was less than $10 billion, and the market cap is still over four times what it was in early 2020.

Because Bitcoin and other cryptocurrencies now make up a visible section of the overall investment market, analysts are starting to pay more attention. Many are starting to notice patterns in cryptocurrencies that can provide them with insight into the stock market, highlighting trends that can show overall investor sentiment.

Predicting the Stock Market With Bitcoin

Investor sentiment is an incredibly important part of investment analysis. While there are countless technical indicators used to predict market fluctuations, it’s important to remember that the market is made up of other people.

The people making the buy and sell transactions that drive market price changes aren’t always doing so based on cold hard technical indicators. Their feelings factor into it in a big way, and crypto markets provide some insight into those feelings.

Bitcoin and other cryptocurrencies have long been seen as highly speculative investment opportunities. Their prices fluctuate wildly, as can be seen from the current drop from all-time highs. Analysts believe that this means that more people buy Bitcoin when they show more speculative enthusiasm when they’re willing to take on higher risks for higher potential rewards.

While that speculative enthusiasm is incredibly pronounced in assets like Bitcoin, it also has an effect on the stock market. Even though stocks are seen as a much safer option than Bitcoin, there is still risk involved. The more willing investors are to take on the risk, the more they buy on the stock market. This pushes the market up or at least slows it during declines.

If Bitcoin investments slow down, it can be a sign that the stock market could be slowing as well. If cryptocurrencies are falling, it’s because even the most risk-loving investors aren’t buying. This can indicate that the overall investment climate is one where investors aren’t ready to buy, which means falling prices in the stock market. We have already seen that the rise in various schemes such as Bitcode Prime which was exposed here tend to scare off investors. This is not surprising due to the fact that cryptocurrency-related scams are constantly on the rise.

Recent Market Developments

It’s no secret that cryptocurrencies are down right now. Bitcoin is down to less than one-third of its November 2021 all-time high. The stock has also been performing poorly throughout 2022. The S&P 500, a stock market index that tracks the 500 largest companies on US exchanges, is down 20% from a peak in December 2021.

While much less pronounced, this decline has mirrored the fall of Bitcoin very closely. That includes a brief late March and early April rebound, followed by a continued drop. On a day-by-day basis, Bitcoin is highly effective in predicting the overall stock market trend. When Bitcoin goes down one day, then the stock market will likely fall the following day.

It remains to be seen how far Bitcoin and other cryptocurrencies will fall before they start to recover again. When that does start to happen, it could be an indicator that the stock market is set for recovery as well.

John Norwood
John Norwood is best known as a technology journalist, currently at Ziddu where he focuses on tech startups, companies, and products.