Here's How the Stock Market Correction Is Affecting This Major Cryptocurrency

The current stock market correction has been difficult not just for equity investors, but also for crypto investors. Across the board, nearly every major cryptocurrency is down for the year.

And, right now, the one cryptocurrency on everyone's mind is Bitcoin (CRYPTO: BTC), which has historically been the bellwether for the crypto market. So just how much of an impact has the stock market correction had on Bitcoin?

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Bitcoin's correlation with the stock market

The answer to that question should have been "not much." That's because Bitcoin has historically been uncorrelated with any major asset class, including both the S&P 500 and tech stocks. In other words, Bitcoin could zig when stocks zagged. Due to Bitcoin's wild volatility, which led to huge market swings up and down, it was pretty much impossible to say that it was correlated with anything.

But that no longer seems to be the case. Bitcoin is now down 10% for the year, and nearly 25% since it hit an all-time high of $109,000 back on Jan. 20. So you could say that the stock market correction has had a very obvious and direct impact on Bitcoin, which is also in correction mode right now.

It's important here to keep an eye on Bitcoin's correlation with the overall stock market. This correlation is a mathematical measurement telling you how connected Bitcoin's moves (up or down) are with the broader market. Historically, this number has been very low, or even negative, suggesting a possible inverse relationship between Bitcoin and stocks.

But, in early January, Bitcoin's correlation with the S&P 500 surged to 0.88, suggesting a nearly 1-to-1 correlation with the stock market. This correlation has remained stubbornly high, suggesting that Bitcoin will likely continue to feel the impact of stock market moves to a much greater degree than in the past.

From a portfolio diversification perspective, a relatively high correlation with the stock market makes Bitcoin much less attractive to investors. It's getting harder and harder to make the point that Bitcoin should be a stand-alone asset class when it is behaving more and more like a highly risky tech stock.

Investor sentiment

It is also possible to measure the shift in investor sentiment. This, too, we can measure with some mathematical precision, thanks to the Crypto Fear & Greed Index. Measured between 0 and 100, this metric tells you what investors are thinking at any point in time. If they are deeply fearful, the number is close to 0. If they are ebullient and euphoric, the number is closer to 100.

Image source: Getty Images.

When Bitcoin briefly dipped below $80,000, that number fell below 20, reflecting intense fear in the marketplace. Back in December, when Bitcoin hit $100,000 for the first time, that number was closer to 80, reflecting intense euphoria in the marketplace. That makes sense, given that Bitcoin hit the $100,000 mark approximately a month after the presidential election, when investors were feeling very bullish about the prospects of crypto headed into 2025.

These days, crypto sentiment can swing wildly between fear and greed, depending on the day of the week. When the White House is talking about creating a Strategic Bitcoin Reserve, sentiment tends to move positive. However, discussions of trade tariffs and economic tightening measures from the White House often lead to a negative shift in sentiment.

Investor flows into Bitcoin

This change in sentiment is having an immediate impact on investor inflows and outflows into the spot Bitcoin exchange-traded funds (ETFs), which have become a popular tool for adjusting one's overall exposure to Bitcoin. For five straight weeks, there were massive outflows, with investors moving their money out of the Bitcoin ETFs.

That makes sense, right? If investors wake up each day feeling fearful, they are going to find ways to act on that fear. And that means shifting money out of the Bitcoin ETFs. That money has to go somewhere, and it now appears that it is shifting into gold ETFs. In the 30-day period ended March 14, $5 billion flowed out of the Bitcoin ETFs, while $10 billion flowed into gold ETFs.

Where is Bitcoin headed in 2025?

If you are trying to predict where Bitcoin is headed next, there are three different pieces to the puzzle: Bitcoin's correlation with the stock market, investor sentiment, and investor inflows (or outflows) to the Bitcoin ETFs. The good news is all of these can be measured mathematically, and can be tracked on a regular, recurring basis.

2025 is shaping up to be an important test for Bitcoin. If it can zig when the stock market zags, investors will know that the "old Bitcoin" is back. They will become more positive about its long-term price prospects, and more willing to pump additional money into the Bitcoin ETFs. And that steady buying pressure over time should help to put Bitcoin on the path to hitting a new all-time high.

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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.