15 Sep 2022 · 3 min read

Will Crypto Prices Ever Be Able to Decouple from Stocks?

Crypto vs. Stocks

Cryptocurrencies and stocks have been making headlines for quite some time. Everyone is wondering whether cryptocurrencies and stocks can coexist in the future. Can cryptocurrency prices decouple from stock prices?

These are difficult questions to answer due to a lack of knowledge about cryptocurrencies and their future. However, some similarities between the two markets may provide insight into what may occur in the future.

What is a Decoupled Market?

A decoupled market is an economic system that is not dependent on stock market performance. The decoupled market exists alongside the stock market but does not rely on the latter's performance to function. This could be considered a form of economic independence.

How Correlated Is Crypto with Stock Market?

There is a close relationship between the price of Bitcoin (BTC) and the value of equities, specifically the value of technology stocks. On a daily timeframe, the correlation between Bitcoin, the leading cryptocurrency by market capitalization, and the S&P 500, which features a heavy tech component, had reached a value of 0.69.

BTC & SPX Correlation Chart

The correlation value is calculated using a method that considers the changes in the index and the cryptocurrency's price over time. In general, correlations above 0.5 are considered very high, and those above 0.7 are considered extremely strong. On the other hand, those between -0.3 and 0.3 are considered weak. 

A score of 1 implies perfect synchrony, while -1 represents complete opposition.

The release of Consumer Price Index data impacted the cryptocurrency and stock markets. The rate of consumer price inflation in the United States has slowed in recent months. It did, however, remain close to a four-decade high.

However, the release of US CPI figures triggered a dramatic sell-off in the stock market, and the crypto market followed suit.

CPI Report & Its Impact on Stocks and Crypto

The most recent Consumer Price Index report showed continued rapid growth and less stabilization than experts had predicted. Contrary to expectations, the Consumer Price Index (CPI) rose 8.3% in August, indicating that the consumer squeeze remains severe. 

The report proved to Federal Reserve officials that more aggressive measures might be required to lower interest rates. As a result, the Fed has been raising interest rates to slow the economy and manage recent high inflation.

Furthermore, the Fed closely monitors the core inflation rate. After excluding food and fuel, consumer prices increased by 6.3% in the year ending last month, up from 5.9% in July and more than the 6.1% predicted by experts. Even when inflation is considered, the report's specifics cause concern.

Stock Market Reaction to CPI Report

The stock market suffered due to the market's dissatisfaction with the CPI report. Stocks fell as August inflation data came in higher than expected, dampening investor hopes for lower prices and a less activist Federal Reserve.

The Dow Jones Industrial Average fell 1,629 points, or 4.99%, to 31,025. The S&P 500 fell 4.77% to 3,932.69, while the Nasdaq Composite fell 6.75% to 12,050.57.

NASDAQ, SPX & DJIA Price Drops On CPI

 Tech companies were particularly hard hit, with semiconductor giant Nvidia falling 9.5% and Facebook parent company Meta falling 9.4%.

Crypto Market Reaction to CPI Report

It turns out that the US inflation rate hasn't slowed down quite as much as experts had anticipated. Therefore, the future may be more difficult for risky assets cryptocurrency.

After the CPI announcement, the cost of risky assets dropped, with the price of bitcoin falling from $22,700 to about $21,000. 

Bitcoin & Ethereum Price Drop on CPI

Ether, the Ethereum blockchain's native currency, decreased from $1,760 to $1,594, indicating that macroeconomic trends have surpassed the positive narrative around that blockchain's Merge.

Will Crypto Prices Ever Be Able to Decouple from Stocks?

It may decouple in the future, but it does not appear to be happening right now. But, as we've seen, the correlation between stocks and cryptos is highly positive, which explains why stocks and cryptos are trending in the same direction. 

Furthermore, we have seen how both market segments reacted to this week's US CPI figures. Stocks and cryptocurrency fell sharply, but cryptos appeared to be more sensitive to fundamentals than stock markets.

As a result, we have seen a 12% drop in Bitcoin and Ethereum, while stock indices fell 4% to 7%.