In the tech sphere, cryptocurrency and blockchain have been a game-changer, gaining acceptance by everyone from small businesses to multinationals.
While there are concerns about its regulation, it is relevant to acknowledge its growing importance and ability to alter global finance and banking completely. We need to assess their regulation’s full impact and potential on the Indian economy and stock markets.
Since the beginning of the year, cryptocurrency values have jumped more than ten-fold, making this year’s market growth look boring.
During the trading session on October 20, Bitcoin hit an all-time record high of $66,974. The surge can be attributed to the debut of the Bitcoin ETF by the New York Stock Exchange earlier this month.
While cryptocurrencies have remained majorly uncorrelated with any traditional assets for the past years, 2020 saw a shift, with bitcoin depicting a positive correlation with the stock market.
Bitcoin’s correlation with the Nasdaq-100, as measured in late May, was around 0.20 per 20-day rolling average, and its correlation with the S&P 500 is 0.29, as of June 2, according to Dow Jones MarketWatch data.
The impact of cryptocurrencies on the stock market can therefore not be denied.
Although causing disruption may seem like a lofty goal, it is far from reality. Wall Street has recently shifted from being hopeful and bullish to downright depressing.
Many observers and researchers were dismayed to see how closely the behaviour of the cryptocurrencies resembled that of the financial market. This sparked the question of how the traditional finance market affects cryptocurrencies and vice versa.
Let us have a look at some significant impacts:
Reframing the Dollar Standard
Since the dollar is the strongest currency globally, it has long been a reserve currency for various countries. It forms the backbone of the global financial markets. Any change in the positioning of the dollar could severely impact financial markets across the world.
With the increased popularity of cryptocurrencies, the dollar’s position is under threat. Due to the decentralized nature of blockchain technology, cryptocurrencies are easily accessible. Additionally, transactions are faster than ever. This has motivated businesses to swap their dollar investments for crypto investments. Cryptocurrencies’ potential for scalability will further speed up the process.
When cryptocurrencies replace US dollars, the value of the fiat currency will fall dramatically. In the event that the US dollar was dethroned, global financial markets would panic as they all use US dollars as a reserve currency.
Trading and Investment in stock markets
The primary purpose of any investment is to earn returns. In the case of cryptocurrency investments, the same rule applies.
It has always been popular to invest in the stock market due to its ownership potential and profit potential. In addition to having a more lucrative upside potential, cryptocurrencies have a decentralized nature, making them an attractive investment option over stocks.
The absence of regulations along with worldwide tradeability makes cryptocurrencies more effective than traditional financial markets.
The emergence of Initial Coin Offerings now allows traders to invest in crypto stock markets in a similar manner to traditional markets with initial public offerings.
Many trading platforms and investment agencies are encouraging bitcoin investors to buy crypto stocks via Initial coin offerings. ICOs offer more convenience and are quicker than traditional methods as crypto uses blockchain as the underlying technology, which eliminates the need for intermediaries.
While conventional financial instruments continue to exist, many global investors have made a move to diversify their portfolios by adding bitcoin and other cryptocurrencies.
The cryptocurrency prices will continue to rise as they have in the past year, resulting in traders moving en masse from traditional stock markets to cryptocurrency stock markets.
Investors will choose instruments that increase profitability and efficiency; therefore, global financial markets will see a severe downturn.
The switch would result in widespread panic and losses across multiple global financial markets due to a disruption of investments and trading activities in fiat currencies.
Stock Market Performance
Earlier, we discussed how cryptocurrency is positively correlated to stock markets. Thus, stock market performance will be impacted by volatility in crypto stock markets.
After having risen many times to their highest levels during much of 2021, the price of significant crypto tokens has plunged 40% to 50% in the month of May.
The stock market experienced a steep decline following the major sell-off by crypto investors.
“What’s interesting is the market is being bullied around by where bitcoin goes,” said Peter Boockvar, the chief investment officer with Bleakley Advisory Group.
It is difficult to tell how much of an effect the cryptocurrency crash has on stock prices. However, the sharp fall in crypto prices is a symptom of a broader problem — an issue that could affect stocks with no direct connection to crypto.
As a result, while bitcoin and other cryptocurrencies behave almost like traditional financial instruments, their volatility induces significant influences on global stock market performance.
To sum up
For the most part, cryptocurrencies have been overlooked in all their potential, but that’s soon about to change. During the next decade, cryptocurrencies will carry on as alternate investing methods or, perhaps, as the primary means of investment.
Although cryptocurrency adoption has not yet reached mainstream status, there have already been numerous signs that it has had a profound impact on stock markets worldwide. The magnitude of those impacts, however, will only become apparent over time.
