Bitcoin remains the main cryptocurrency, laying the movement of the entire market. About the rest of the crypt, we can say that it goes for bitcoin. But what or who does bitcoin itself follow then? Behind the stock market. It is reflected in the most complete way by the three most popular stock indexes: S&P 500, DJI and NASDAQ. Today we will talk about the latter.
What NASDAQ is talking about
NASDAQ is the stock index of the Nasdaq Stock Exchange (NASDAQ:NDAQ). It is formed based on the market capitalization of large international companies. For the most part, these are companies in the technology sector (Apple (NASDAQ:AAPL), Meta (NASDAQ:META — recognized as an extremist organization in Russia and banned), Google (NASDAQ:GOOGL), Adobe (NASDAQ:ADBE), Amazon (NASDAQ:AMZN), etc.) But in total, more than 3,000 different stocks are included in NASDAQ, and this number is constantly changing.
The higher the market capitalization of a company, the more it affects the overall NASDAQ index. That is why it is so important to track the reports of large technology corporations, because they are the ones who set the trend for this stock index.
Dynamics analysis
Below are the charts of Bitcoin (orange) and NASDAQ (blue) from September 2021 to the present day.
With the naked eye, you can see how similar the movement of these graphs is. In November last year, NASDAQ reached a peak value, in the same month, the price of bitcoin showed itself accordingly. Then a long fall began, which continues to this day. Moreover, periodic takeoffs are almost exactly repeated.
For example, you can pay attention to a narrower time period: from February to mid-June of this year.
According to these charts, you can practically play “Spot the Difference”. Bitcoin definitely follows the NASDAQ index.
Correlation of BTC and NASDAQ
The higher the correlation, the stronger and more often bitcoin and NASDAQ repeat each other. Simply put, correlation indicates how strongly the cryptocurrency market reacts to the stock market.
For example, the correlation coefficient 0.7 indicates that with a probability of 70% bitcoin repeats the movement of the NASDAQ index, and with a probability of 30% it deviates from the trend of the stock index.
The graph shows the dynamics of the Pearson correlation coefficient between bitcoin and the NASDAQ index from November 2021 to the present day.
Do you see this rather large segment when the correlation line was almost straight and the coefficient was in the range from 0.8 to 1? From mid-March to mid-July, that is, for 4 whole months, there was a high correlation between bitcoin and NASDAQ. At that time, the cryptocurrency market practically repeated the stock market. But then something went wrong.
On July 25, the correlation index fell to a record low since December last year – 0.32. That is, at this point, bitcoin could already deviate from the movement of the NASDAQ index with a probability of 68%.
Stock markets were waiting for the publication of reports of large companies, as well as the Fed’s decision on the base interest rate. As soon as the reports began to appear, NASDAQ followed the growth trend, and bitcoin reacted as well. The correlation coefficient began to grow.
Let’s summarize
The analysis allows us to conclude that Bitcoin follows the NASDAQ index. This happens for a very simple reason. Large technology companies, whose shares are included in the NASDAQ index, have a huge influence on major investment players in the market. Roughly speaking, most investments today are where the assets of IT companies are concentrated. And Bitcoin, like the entire cryptocurrency market, needs large investments to show significant growth.
In addition, more and more companies whose shares make up the NASDAQ index own bitcoin. For example, Tesla (NASDAQ:TSLA), MicroStrategy (NASDAQ:MSTR) and Digital Currency Group invest in Bitcoin with corporate savings. Moreover, the total ownership of MicroStrategy bitcoin is 129,699 BTC. That is, to some extent, bitcoin is already embedded in NASDAQ.
Another issue is that the stock market is heavily influenced by the inflation rate. And if the market goes into a protracted recession, bitcoin can act as an alternative to an unstable fiat currency. And then we will be able to observe in a relatively long-term perspective the picture in which Bitcoin is growing with a falling or unchanged NASDAQ index.
