Bitcoin and the stock market could trade more closely as the crypto world expands

Published Tue, Apr 20 20219:49 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

Bitcoin's wild sell-off this past weekend was followed by weakness in the stock market. While the two markets are not tightly linked, the correlation is expected to grow.
Strategists say as more investors become involved with bitcoin and other crypto assets, the link may tighten between the crypto world and stocks.

The correlation between bitcoin and the stock market could grow as more institutions become involved with cryptocurrency and the number of equities linked to digital currencies grows, strategists said. For now, the link is loose: sometimes high, and other times negative. Bitcoin has been highly volatile, but watching the cryptocurrency has sometimes been a clue to sentiment. "When I come in in the morning I let bitcoin give me a bit of a cue about how the market might trade," said Katie Stockton, chief technical strategist at Fairlead Securities. Bitcoin's wild weekend sell-off set the tone for Monday's stock market decline, she said. "Lately, it definitely seems to be trading like a risk asset, but not a reliable correlation that we can trust to remain in place," Stockton said. "But of late it has certainly been indicative of sentiment, and it's been treated like a risk asset. You come in in the morning," she said. "You see bitcoin down 10%. That to me, is a check against equity market prices." Bitcoin was flattish Tuesday morning, while stock futures pointed lower. Bitcoin was at $56,129 around 9:40 a.m. ET, according to Coin Metrics. On Monday, it was lower in early trading but stabilized roughly around $56,000, following a 15% decline Sunday. "I think bitcoin was a reflection of the risk appetite out there, and just speaking in general, if there is a sell-off in bitcoin, maybe that's a sign of some risk aversion elsewhere," said Peter Boockvar, chief investment officer at Bleakley Global Advisors. "There's certainly a lot of giddiness in that space," he said. "There's a lot of 'throw caution to the wind' in terms of risk." A relationship that may tighten over time Boockvar added that it's hard to say whether there's a link between the crypto and equities market that's lasting. Leeor Shimron, Fundstrat's vice president of digital asset strategy, has studied the correlation between the stock market and bitcoin. He finds that it sometimes is highly correlated and other times not. But his theory is that the link will only expand and they will become more closely correlated as the crypto market grows, with more institutional involvement and more crypto companies going public. The prices of cryptocurrencies rallied ahead of last week's public offering of the Coinbase exchange. "It makes sense those correlations would increase over time," Shimron said. At some points in time, the correlation was more than 80%, and other times it was negative. Bitcoin surged to a high of just under $65,000 last week as investors focused on the Coinbase offer, and then retreated to under $52,000 on the weekend. "We think bitcoin is going to move higher for the rest of the year, even if we consolidate for the next few weeks," said Shimron. Fundstrat expects bitcoin to reach $100,000 by year end. Stockton also said the correlation should grow. ''To the extent there's more and more products that hit the market, whether it's an ETF, or another stock, the more products that are available to investors to trade, that will further fuel interest," she said. "Everybody wants to find the new hot thing, and even if it's not new, it's hot," said Stockton. The next big disrupting force in the market could be the entrant of more central banks with their own digital currencies. So far, China is taking the lead. Become a smarter investor with CNBC Pro . Get stock picks, analyst calls, exclusive interviews and access to CNBC TV. Sign up to start a free trial today .

Omar Marques | LightRocket | Getty Images

For now, the link is loose: sometimes high, and other times negative. Bitcoin has been highly volatile, but watching the cryptocurrency has sometimes been a clue to sentiment.

"When I come in in the morning I let bitcoin give me a bit of a cue about how the market might trade," said Katie Stockton, chief technical strategist at Fairlead Securities.

Bitcoin's wild weekend sell-off set the tone for Monday's stock market decline, she said.