There seems to be a correlation between the price of bitcoin, the cryptocurrency with the biggest market capitalization, and the forward price to earnings ratio of stocks listed in the S&P 500. As reported by Bloomberg, the valuation measure peaked on the same day in Dec. 2017 for bitcoin and the P/E ratio.
The famous Morgan Stanley analyst, Michael Wilson, published a report about his observations, highlighting an interrelationship and similarity in their movements. The forward price to earnings ratio is calculated by dividing the total market capitalization of a stock to the projected company earnings for the next fiscal year.
Wilson wrote in his report, “While we do not expect this relationship to continue to hold so tightly we do think it will be hard for price-to-earnings to move significantly higher or lower without a commensurate move in the digital currency.”
Bitcoin may be in its nascent stage at the moment, but analysts have already begun comparing its movement with the stock market. Importantly though, the two assets could not be any different. Bitcoin is a cryptocurrency, while the S&P 500 is an index of the top 500 traded public companies. Equity researchers have pointed out how bitcoin and S&P 500 both hit highs around the same time in Dec. 2017 and then also underwent a major correction since the start of 2018.
Similarities in the Price Charts (Bitcoin/Stocks)
However, there could also be completely different reasons for their rise and correction. Buoyed by the corporate tax rate cut announced by President Trump, stocks began rallying as investors expected better earnings and more efficient allocation of saved capital. The excitement didn’t last long though, as the Federal Reserve raised interest rates and flushed out some of the capital in the equity markets. Bitcoin, after a tremendous rally in 2017, has since cooled off and is down by more than 50 percent from its record high.
A major reason for the correction of the cryptocurrency market can be the action of financial regulators across the globe. Despite that, world finance leaders at the G20 Summit in Argentina stated that there was a need to regulate cryptocurrencies.
Nevertheless, investors need to be cautious as reports indicating a relation between cryptocurrencies and the stock market grows with each passing day. Speaking about the similarities in the price charts and other observed patterns between bitcoin and the stock market. Fundstrat Global Advisors’ Tom Lee told CNBC:
“It (bitcoin price graph) could easily look like a chart that looks like the S&P because both had a parabolic move and then subsequently gave back some of these gains.”
His remarks came to light in the wake of a big sell-off that occurred in the equity markets Feb. 2018. He also acknowledged that “the connection between the two is really limited.”
“Cryptocurrencies have their own economy based on activity on that blockchain. Equities have their own economy based on earnings per share multiples. The institutional overlap is essentially zero,” Lee continued. He concluded by warning investors to be cautious and not invest in cryptocurrencies or the stock market expecting them to move in the same direction all the time.