Bitcoin is plunging: Here's Why Stock Investors Should be Watching Crypto

Bitcoin and other cryptocurrencies have been plunging recently. From an all-time high of more than $126,000, bitcoin in the last two months has dipped below $81,000, though briefly.

While it has rebounded back around $87,000 for the moment, the decline is bad news for crypto traders, of course. But falling prices may be flashing a huge warning sign to stock investors, too.

Bitcoin bulls have touted the original crypto coin as the cure for... well, almost everything – inflation, money-printing, financial inclusivity – but bitcoin trades a lot like other high-risk stocks.

Over the past decade, bitcoin has risen every year that the S&P 500 Index has risen. If bitcoin closes out this year with a loss – that is, below $93,429 – it will be the first time in the past decade that this correlation has not held, says Business Insider.

But bitcoin is an even higher-risk play. Unlike public companies – which tend to produce revenue and earnings – bitcoin is backed by nothing. Its price is determined solely by what investors are willing to pay for it. So bitcoin's price may act like a leading indicator of investor sentiment.

That's why stock investors may want to carefully consider what's going on with bitcoin. If bitcoin continues to drop, it may signal downside for stocks. But if bitcoin moves back higher again, signaling investors' greater risk appetite, stocks may have plenty of room to move higher.

How Much is Bitcoin Really Worth?

The price of bitcoin is a signal of practically pure sentiment. That's because bitcoin is not based on anything but traders' expectations of what the next trader will pay for it.

Bitcoin is not based on the assets or cash flow of an underlying entity, as a stock or bond is. In those latter cases, a company's growth over the long term determines an investment's success. If a company grows earnings, its stock can go stratospheric for years, even decades.

But that's not the case at all for bitcoin. For bitcoin, traders can turn a profit if they can sell it for more to other traders who are even more optimistic about their ability to sell it for even more. So crypto bulls need more traders "in the pool" to push up the price of bitcoin and other cryptos.

The structure of cryptocurrency markets means that these assets are a great indicator of traders' appetite for risk, what investors call "animal spirits."

When traders rush into the market and buy high-risk investments, they're seeking risk due to the potential reward, and markets move higher. When traders move into "risk off" mode, however, markets can drop, even plunge, and even strong value stocks get slammed by the downturn.

Given their high risks, bitcoin and other cryptocurrencies may indicate the future direction of stocks, which themselves rely on investors' animal spirits, at least in the short term.

And what we're seeing in the past two months does not look bullish for stocks, even if it may turn around and signal bullishness soon.

Bitcoin: Why Stock Investors Should be Careful

To get an idea of how closely bitcoin is correlated to moves in the stock market, let's look at a comparison between the performance of the S&P 500 and bitcoin in 2025.

Like stocks, bitcoin traded lower in early 2025 on fears about President Donald Trump's tariffs, and it has turned down in the past couple months, while the S&P 500 keeps plugging along, thanks in large part to the strength of AI-related stocks.

Of course, bitcoin is much more volatile, so the ups and downs are both more extreme than the moves in stocks, even the high-risk, high-reward stocks that are leading the bull run.

Previously, bitcoin has tended to do well when stocks do well. For example, bitcoin responded strongly when the Federal Reserve dropped interest rates to near zero in early 2020 as part of the COVID-19 stimulus.

Bitcoin zoomed from less than $7,000 in early April 2020 to more than $68,000 by early November 2021 – then it turned lower just weeks before the S&P 500 peaked in late December.

At the time, bitcoin and stocks were responding to the potential lower interest rates. The Fed had been signaling for months that it was going to boost short-term rates, and risk assets moved lower in response.

Today, the downturn in bitcoin may be showing a downturn in broader sentiment that hasn't appeared in stock prices yet.

Are bitcoin prices the canary in the coal mine for stocks? Or is the decline in bitcoin due to factors that really only apply to that market?

Why is Bitcoin Falling?

To be sure, bitcoin and the S&P 500 are driven by different factors. While earnings growth drives stocks over the long term, bitcoin prices respond to some different, crypto-specific factors.

So, the difference in those drivers could be temporarily throwing off a correlation between the two markets. Some of these key differences could include:

• Lack of bitcoin liquidity: The bitcoin market is not extremely liquid, as major U.S. financial markets are. So a major bitcoin buyer or seller can move the price much more than, say, a trader of Apple (AAPL), especially if they're trying to act quickly.

• Leveraged bitcoin traders: The liquidity risk is exacerbated if traders have leveraged positions. A small crypto downdraft has the potential to spin up into a snowball, as traders sell to meet margin calls on their accounts.

• Self-sustaining volatility: Bitcoin's tremendous volatility always has the potential to become self-sustaining, with small declines becoming large ones. In fact, bitcoin has suffered more than 60% losses in a calendar year three times in its short lifetime.

• Fast ETF money: Bitcoin ETFs now allow traders to get in and out at low cost without having to work through a crypto exchange. These money flows may exacerbate bitcoin's relative lack of liquidity even more, making it more volatile.

These factors might be playing out together right now in the cryptocurrency markets.

For example, noted bitcoin investors such as the company Strategy, headed by uber-bull Michael Saylor, have taken a leveraged position in the coin. Due to the significant leverage Strategy uses, the value of its stock can fluctuate significantly as bitcoin gyrates up and down.

That kind of leverage may also invite a "bear raid." Some traders may take a short position on bitcoin in an attempt to "pop" these leveraged players and create a spiraling decline. So, the bulls' leveraged position may make them especially vulnerable to a blow-up if bitcoin turns lower.

Meanwhile, factors such as falling short-term interest rates should be a positive for both bitcoin and stocks. For the moment, only stocks seem to be responding favorably to them, however.

The S&P 500 has been hitting new all-time highs this year on the expectation of falling rates, and other riskier segments of the market have also responded favorably.

In fact, the Russell 2000 Index, which tracks the riskier segment of small-cap stocks, reached its all-time high in early December.

But bitcoin seems to be unaffected by falling short-term rates, at least for the moment.

Will the S&P 500 fall?

So, we're seeing a significant divergence in bitcoin and the S&P 500, when they typically move together for similar reasons. Does it spell disaster for the S&P 500?

If the factors affecting bitcoin are specific to that digital asset, though other cryptocurrencies have plunged too, then stocks may not be set to fall.

But if bitcoin bounces after this hard fall, it may signal that the "risk on" trade is still in effect, suggesting that the S&P 500 and its AI stocks may be ready to move even higher.

In any case, stock investors may want to pay close attention to bitcoin prices because they may show how the leading edge of sentiment is reacting to an AI-driven economy.

Should investors prepare for an AI crash or buy the dips?

Analyst and True Wealth editor Brett Eversole just posted a surprising answer.

According to Brett's research, there's a pattern taking shape that could defy all the worst predictions about a bust. He's calling it a Melt Up Tsunami. And he has identified at least a half-dozen stocks that could benefit, including his No. 1 stock to own right now. He shares the ticker in this new presentation.

Regards,

James Royal