Classic traditional finance system
Traditional finance system and it's relation with Cryptocurrencies
Part 1
Items in this lesson
Traditional finance system and it's relation with Cryptocurrencies
Part 1
Market Correlation with Equities (e.g., S&P 500)
In Bull Market (prices go up) :
Bitcoin and crypto markets often move in tandem with traditional risk assets like equities. When the S&P 500 rises, it suggests investors are in a “risk-on” mode, generally optimistic about economic conditions and more willing to invest in high-risk assets, including Bitcoin.
In Bear Market (prices go down) :
During times of economic uncertainty or downturns, Bitcoin and other cryptos often show higher correlation with the S&P 500 and other equity indices. Investors tend to sell off riskier assets (including crypto) to seek safer investments, which can pressure Bitcoin prices downward.
What Are Equities?
What Are Equities?
Equity Definition: Equities, or stocks, represent ownership in a company. When investors buy shares in a company, they become part-owners and may benefit from the company’s success through dividends (profit-sharing) or increases in stock price.
Why Companies Issue Stocks: Companies issue stocks to raise capital without having to repay debt, which they might use for expansion, R&D, or other business activities. When a company first offers stocks to the public, it does so through an Initial Public Offering (IPO), where shares become available for public trading on the stock exchange.
Think of a company like a big pizza. Now, let’s say that a company wants to let people own pieces of this pizza. They cut it into small slices and sell each slice to people. Each slice is called a “share.” When someone buys a share, they own a small part of the company.
When you own a share of a company, it’s called “equity.” So, equities are just pieces of a company that people can buy and own, like pizza slices! If the company does well and makes more money, your slice might get bigger in value, so it’s worth more if you want to sell it one day.
What do equities, or stocks, represent?
Ownership in a company
A loan to a company
A company’s revenue
A company’s expenses
Why do companies issue stocks?
To give employees bonuses
To raise money without repaying debt
To lower their taxes
To increase their expenses
Understanding the S&P 500
What It Is: The S&P 500 (Standard & Poor’s 500) is an index of 500 of the largest publicly traded companies in the United States, chosen for their size, liquidity, and industry representation. It’s widely seen as a key benchmark for the health of the U.S. economy and overall stock market.
Market Weighting: The S&P 500 is weighted by market capitalization (stock price multiplied by the total number of outstanding shares). Larger companies like Apple or Microsoft have a bigger impact on the index than smaller ones. This weighting means that movements in big companies heavily influence the index’s overall performance.
Imagine you have a group of 500 of the biggest, coolest companies in the United States – companies like Apple, McDonald's, and Nike. The S&P 500 is like a giant scoreboard that keeps track of how well these 500 companies are doing.
When people buy things from these companies, or when these companies invent awesome new products, they usually make more money.
When they make more money, their "score" goes up on the S&P 500 scoreboard. If lots of companies in the S&P 500 are doing well, the scoreboard goes up. But if they’re having a tough time, the scoreboard might go down.
People like to watch the S&P 500 because it shows how well lots of businesses are doing all together, sort of like how we check a weather forecast to see if it’s sunny or rainy. When the S&P 500 is "sunny" and doing well, people feel good about spending and investing money. But if it's “rainy” and going down, people might save more money and buy fewer things because they feel cautious.
In short, the S&P 500 is like a giant team scoreboard for the top companies in the U.S., and it helps us understand how the economy is doing!
How is the S&P 500 measured?
By the number of employees in each company
By the amount of profits each company makes
By market capitalization (stock price multiplied by numbers of shares)
By the age of the company
What is Market Capitalization?
Market capitalization, or "market cap" for short, is a way to figure out how big a company is based on the value of all its shares of stock.
How It Works: Imagine a company is like a giant pizza, and each slice of pizza is a share, or a small part, of the company that people can buy. To find the company’s market cap, you multiply the price of one slice (one share) by the total number of slices (all shares).
Example: If one slice costs $10, and there are 1,000 slices, then the total value of the pizza (the company) is $10,000. So, the market cap is $10,000.
Why It Matters: Market cap helps people understand the size of a company. Companies with big market caps are usually more stable, while smaller companies can be riskier but might grow faster.
So, market cap is a quick way to see if a company is big, medium, or small!
And it works the same way with Crypto : each coin or token has its own market cap based on the number of token x current price
How the stock market Works
Stock Exchanges: Stocks are traded on exchanges like the New York Stock Exchange (NYSE) or NASDAQ. These exchanges act as marketplaces where buyers and sellers come together to trade shares.
Just like Kucoin or Bybit are used in crypto.
Stock Prices: Stock prices fluctuate based on supply and demand. When more investors want to buy a stock (high demand), its price goes up. When more want to sell (higher supply), the price goes down. Factors influencing supply and demand include company performance, economic data, market sentiment, and global events.
Trading Sessions: The stock market is generally open from Monday to Friday, during specific hours. In the U.S., it’s from 9:30 a.m. to 4:00 p.m. ET, though there are pre-market and after-hours trading sessions with lower volume and higher volatility.
Why is traditional finance related to bitcoin in 2024?
Big Companies Invest in Bitcoin:
Big finance companies, called hedge funds, like to buy and sell investments. They used to just stick to things like stocks and bonds, but now they also buy Bitcoin. This makes Bitcoin act a bit like regular investments in the stock market because the same big companies are buying both!
Bitcoin ETFs Make Bitcoin Easy to Buy:
Finance companies made something called a Bitcoin ETF. It’s like a big bucket of Bitcoin that people can buy shares in without handling Bitcoin directly. So, anyone who wants to invest in Bitcoin can now buy shares of a Bitcoin ETF, just like they would with company stocks.
Since Bitcoin ETFs are traded in the same places as stocks, Bitcoin has become part of the TradFi world.
Same News Affects Both Bitcoin and TradFi:
When there’s big news, like changes in the economy or interest rates, it affects both the stock market and Bitcoin. Since the same big companies are in both, they make similar decisions, like buying or selling when news is good or bad. So, Bitcoin and the stock market often go up and down together.
What is a Bitcoin ETF?
A direct way to own Bitcoin that requires digital wallets
A type of bond that pays interest
A way to buy shares of Bitcoin without directly handling it
A government fund for buying Bitcoin
How does economic news affect both the stock market and Bitcoin?
It doesn’t affect them
They are affected in opposite ways by news
News changes how hedge funds buy and sell both stocks and Bitcoin
News only affects Bitcoin, not the stock market
