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Published: Sep 19, 2022 8 min read

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Illustration of two canoes going in the same path. One canoe has a bitcoin and the other a stock chart
Kiersten Essenpreis for Money

If you're a stock market investor looking for some relief in crypto, you've been out of luck this year.

Stocks and cryptocurrencies are very different kinds of investments. Yet the stock market and cryptos like bitcoin and ether have moved largely in tandem with one another during many of the major ups and downs investors have endured in 2022. Just look at June, when the S&P 500 fell into a bear market — and bitcoin, the largest cryptocurrency by market value, also plunged.

That doesn't bode well for one of the main pro-crypto arguments: that it can help diversify your portfolio because crypto prices are supposedly not correlated to stock prices. If instead crypto prices rise and fall in a similar trajectory to stocks, as they have lately, that undercuts one of the arguments for holding crypto.

But while experts acknowledge that the prices have engaged in similar price patterns of late, they say there's a bigger picture investors should consider. And the alignment of stocks and cryptos might even indicate good news for the crypto industry as a whole.

"It is evidence of a positive trend," says Greg King, CEO and founder of Osprey Funds. That trend is the growing adoption of crypto.

Here's what to know about why stocks and crypto prices have mostly mirrored each other this year and what we can expect moving forward.

Patterns for stocks and crypto prices

Morningstar charted the growth of $10,000 invested in the MVIS CryptoCompare Digital Assets 100 Index, which tracks the performance of the 100 largest digital assets, compared to the growth of $10,000 invested the S&P 500 from the beginning of the year through Sept. 13.

As you can see, the two lines have moved similarly so far in 2022:

Source: Morningstar

Whether you're looking at stocks or bonds, cryptos or commodities, financial markets have endured tons of volatility this year. Much of that has been attributed to the Federal Reserve's reaction to sky-high inflation.

The central bank has been hiking interest rates — most recently by three-quarters of a percentage point — to try to battle spiraling consumer prices. While those increases are implemented with the aim of cooling the economy without tipping it into a massive downturn, they also tend to crimp the price of financial assets, like stocks and cryptos. There are also geopolitical tensions impacting the markets.

Just because crypto has wildly different fundamentals from an asset like stocks doesn't mean it's immune to the same kind of selloffs when investors get spooked.

"Crypto is very much a risky asset class and so it's trading in line with other risk assets at the moment," King says.

As Madeline Hume, senior research analyst at Morningstar, puts it: "When things start to go wrong, they tend to go wrong in a lot of different places at once."

And the more that crypto gets integrated into people's portfolios, the more it's going to obey the laws of people's portfolios, she adds.

What this means for crypto prices

A decade ago, there wasn't a lot of overlap among bitcoin holders and institutional equity holders — but times have changed, King says.

"If you have the same people holding stocks and crypto, then as those entities or individuals get risk averse because of macro environments, they're going to sell risk assets perhaps on a pro rata basis across a portfolio," King says. "It is just a sign of maturation in the crypto space and more adoption by a wider audience."

Professional investors tend to be concerned with quarterly and yearly performance data, which is "kind of in contrast" with long-term buy-and-hold investors, he adds. If crypto investors were just buy-and-hold investors, we wouldn't see the selling even during these changes to the macro environment, including factors like high inflation and global tensions, but we are.

"While that may be a negative as far as price activity in the short term, it's positive as far as the long-term potential future appreciation of bitcoin because it shows increased adoption by a professional investor class," King says.

Can we count on stocks and crypto moving together?

As we see more adoption, the pattern may become stronger.

"As crypto becomes more mainstream and there's more and more hype, I think you're just going to see that correlation be more in play," says Ali Pourdad, CEO of Quantfury Trading.

But just because we're seeing this pattern now doesn't mean we can assume crypto and stocks will move in tandem all the time.

"In the broad scheme of things, relative to other asset classes, crypto is pretty different from stocks," Morningstar's Hume says.

Morningstar doesn't necessarily recommend crypto as part of a diversified portfolio. Still, while crypto may not exactly be the stock "hedge" advocates have been hoping for, it does correlate somewhat with some asset classes that Morningstar does tag as diversifiers to stocks, Hume says.

It's important to factor in that the financial markets have been struggling recently. When all is smooth sailing, asset classes tend to move based on the unique fundamentals of their particular market as opposed to all going south together, she adds.

Also, just because two asset classes move in a similar direction doesn't mean it's necessarily for the same reasons. For example, stocks may have rallied in August at the same time that crypto prices experienced a bump, but there were different forces at work.

"While you might think that that is a result of just the two becoming more linked in general, what was happening at that point in time is there were positive developments coming out of Ethereum," Hume says, referring to an update to the Ethereum blockchain that should make the network much more energy efficient. "It's always important to kind of look under the hood and see if there are any idiosyncratic factors that can explain the relationship before painting with a broad brush and saying they're totally interlinked now and they're going to be moving together going forward."

What does this mean for crypto investors?

Investors should look at crypto independently from traditional equities, Pourdad says.

"If you look back far enough for sure there have been many instances where there hasn't been any correlation and crypto has done its own thing," he adds.

Plus, crypto should really remain a small percentage of your portfolio — between 2% and 5%, as some financial advisors recommend — if you're going to invest in it at all. It's a super volatile asset, and its future is still somewhat murky, in part due to a lack of clear regulation.

If you do decide to buy crypto, experts tend to say you shouldn't try to time the market. Instead, treat crypto as a long-term investment that you buy and hold.

"If you believe in the underlying assets that you're investing in, then you just hold similar to how you would make a decision in the equity market," Pourdad says.

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