Bitcoin’s Trading Patterns Resemble Those of Stocks Nowadays

A dismal day befell your retirement funds—indeed, it was a day rife with misfortune, yielding no positive outcomes. By the time afternoon hit, the S&P 500 had taken a plunge exceeding 3 percent, with the Nasdaq, home to major tech equities, down by 4 percent. Meanwhile, the spirits of those incessantly hitting refresh on their investment portfolios plummeted by a staggering 45 percent. The financial hit extended to Bitcoin, the bellwether for cryptocurrencies, witnessing a 9 percent drop.

The dance between stocks and crypto has varied over the past half-decade, with periods of synchronized movements and others of divergence. Recently, there’s been a noticeable trend toward convergence over the last month. Whether this trend will persist or the paths of stocks and Bitcoin will once again fork is yet to be seen.

This year marks Bitcoin’s striking resemblance to stock not in its return rates, but in ownership experience. Days when the stock market falters do not necessarily spell doom for Bitcoin; however, the essence of holding Bitcoin is now akin to stock ownership. Early Bitcoin advocates envisioned it as a decentral, independent financial entity, but that vision dissipated long ago. Any notion that Bitcoin can stand alone, impervious to the daily drivers of global financial markets, now seems preposterous. The recent severe downturn in the U.S. stock market was paralleled by an even harsher Bitcoin slump, and with it, the days of considering crypto’s bargaining points distinct from those of stocks are gone. Bitcoin enthusiasts must now grapple with the reality of being entwined with the overarching financial system—for better or worse—and accept the apologies that accompany this new role.

The decentralization that underscored Bitcoin’s initial allure, as outlined in the foundational white paper in 2008, is central to its narrative. Its existence beyond the reach of governmental and banking institutions was considered foundational. This premise allowed for simplified financial exchanges, especially benefiting those in repressive situations but also, in practice, saw utilizations tied to illicit activities. The dream of decentralization, though, has been besieged for over a decade now. The crypto purists of yesteryear have come to the realization that accessibility holds the key to Bitcoin’s expansion. Not everyone is comfortable managing a so-called “private key,” but operating a Coinbase account? Effortless.

Today, private keys have largely moved off personal flash drives to exchanges that operate very similarly to traditional stock brokerages. As of last autumn, platforms like Coinbase had custody over approximately 5 percent of all bitcoins in circulation. Several exchanges are responsible for managing even greater shares. While some “whales” maintain vast bitcoin holdings, most persons holding bitcoins—or more accurately, fractions thereof—have entrusted their digital wealth to a select group of companies. This is no different than investors stowing their stocks with firms such as Fidelity or Vanguard.

The pillar of decentralization crumbled some time ago, rendering the distinction between owning cryptocurrency and owning stock nearly indistinguishable. A decentralized cryptocurrency meant resilience against individual institutional failures jeopardizing the currency’s value. However, a centralized one meant that the 2022 implosion of Sam Bankman-Fried’s FTX—evocative of a supernova’s explosive collapse—cast a protracted shadow over the entire cryptocurrency market. Crypto, it turned out, was as vulnerable to a tainted act in the marketplace as any traditional financial instrument, drawing fair parallels to the likes of Lehman Brothers.

The semblance between owning bitcoins and owning stocks became even more pronounced early last year when regulators in the United States greenlighted exchange-traded funds (ETFs) for Bitcoin. These ETFs allowed financial managers to dabble investor funds in crypto, paralleling Bitcoin’s valuation with near precision. Bitcoin virtually transformed into an equity class, lining up in brokerage portfolios alongside other investments. Crypto-centric entities like Coinbase made Bitcoin more accessible, while Bitcoin ETFs eased entry further still, funneling billions into Bitcoin’s market.

Yet, the recent market turmoil underscored the dark side of treating bitcoins akin to stocks. In the wake of a tumultuous stock market week, investors seeking to limit risks withdrew a significant sum from Bitcoin-related ETFs, compelling fund managers to liquidate actual bitcoins. The attraction now expands beyond hardcore cryptocurrency enthusiasts to include institutional and casual investors. However, these new Bitcoin stakeholders view the asset through an investment lens—not unlike volatile equities. Tumultuous times coax these investors to withdraw their stakes. Concurrently, even cryptocurrency tokens not bundled in ETFs have endured a battering. No corner appears safe from volatility.

Bitcoin’s evolution presents an ironic twist in its narrative. It has not become the currency for the present or the imminent future. Yet, it hasn’t been a transient hype either. Bitcoin has risen to significant prominence within the financial world in a way few could have predicted—not by evolving into a practical currency but rather by evolving into a notable securities class with its own wealth creation and depletion cycles, which sometimes coincide with those of traditional stocks.

The true Bitcoin devotees may yet see not only monetary success but also ideological vindication. A scenario where Donald Trump ascends to victory, the U.S. government purchases substantial bitcoins to settle its debts, and Bitcoin’s value skyrockets is within the realm of possibility. The day when Bitcoin achieves its promised potential and becomes the payment method of choice for even mundane purchases may still dawn.

But barring a radical transformation, crypto remains merely an investment class for most of us, with Bitcoin leading the way. Despite its roots as a distinctive class, swayed by factors like Elon Musk’s tweets, viral memes, or the trading shenanigans of a notorious crypto hedge fund, Bitcoin is now experiencing shifts that are more aligned with those of traditional stock markets. The underlying stock market has already taken on traits of cryptocurrency trading, and conversely, Bitcoin has adopted characteristics akin to conventional stocks. This shift heralds greater stability for the crypto realm but is a setback for those who wish for it to remain singular.