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Cryptocurrencies impact financial markets in different ways. Find out how bitcoin affects the stock market.
Multiple studies show a strong relationship between cryptocurrencies and stock markets. Many cryptocurrency critics say digital currencies like bitcoin are significantly disrupting the stock market. On the other hand, proponents argue that bitcoin is the most revolutionary financial instrument, offering the best hedge against the vulnerabilities of stock markets. Nevertheless, the following article analyzes the key ways through which bitcoin affects the stock exchange landscape.
Challenging the Standard of the US Dollar
For many years, the US Dollar has remained as the reserve currency for the world’s economy. It forms the core of the global financial network that comprises different stock markets. That means even the slightest glitches to the US Dollar standard could significantly affect global financial markets. The increased adoption of bitcoin and other cryptocurrencies is rapidly challenging the position of the US Dollar as the global reserve currency.
The decentralization of bitcoin ensures improved access to capital. Besides, its underlying blockchain technology enables users to conduct bitcoin transactions much faster and safer. As a result, many individuals and corporations now opt to invest in bitcoin over the US dollar. The projected surge in bitcoin price over the coming few years would only accelerate that process.
Challenging the US Dollar standard will disrupt the stock markets by forcing investors to choose bitcoin over the US Dollar. Dethroning the US Dollar would also depreciate its value, causing widespread panic across global stock markets that use the dollar as their reserve currency. That would significantly alter the dynamics of global financial markets.
Hindering Fiat Currency Investments and Trading
Like other cryptocurrencies, bitcoin trading fulfills the same purpose as trading traditional stock market instruments. Many people trade on stock markets because it offers capital ownership and profits, which bitcoin traders also receive. Bitcoin trading is even more lucrative since it is decentralized, and people can trade it worldwide. It is also more efficient than traditional stocks as bitcoin is not subject to any authority or government.
Today, many cryptocurrency trading platforms and investment companies, like the Bitcoin System, are issuing Initial Coin Offerings to bitcoin traders and investors more conveniently. Investing in those ICOs is more straightforward and faster than conventional methods since bitcoin transactions are conducted electronically without intermediaries. Although the traditional financial instruments will remain in play, many global investors have begun diversifying their portfolios to include bitcoin and other cryptocurrencies.
Crypto market analysts predict stock market investors and traders will rapidly shift to bitcoin holdings and trading if the prices continue to rise as experienced in the recent months. It is a renowned business strategy that most investors would go for the instruments that promise improved efficiency and profitability. That would essentially hinder fiat currency investments and trading activities, resulting in widespread panic and losses across various global financial markets.
Stock Market Performance
Bitcoin impacts the stock market performance both positively and negatively. A past study conducted across the stock markets in the Middle East and North Africa regions revealed bitcoin’s negative impacts on stock market performance. It established that a 1% increase in cryptocurrency profits reduces the financial market performance by 0.15%. Those findings apply to the Gulf nations that strictly adhere to the Islamic sharia law.
Alternatively, a 1% surge in cryptocurrency returns increases the stock market performance by 0.13% among countries with more liberal Sharia laws. Although bitcoin and other cryptocurrencies behave almost the same way as conventional financial instruments, their volatility induces unique impacts that could either appreciate or depreciate stock market performance worldwide.
While bitcoin is still in the early stages of mainstream adoption, there are already clear signs of its vast impacts on stock markets worldwide. However, we will only be able to discover the severity of those impacts with time.
