How Do Cryptocurrencies Influence Financial Markets?

Global finance has undergone a phenomenal change in the bygone era of 2021, courtesy of the unprecedented Covid-19 pandemic, the Russia-Saudi Arabia oil price war, and the weakening US dollar. The 2020 financial crisis led us to the vicissitudes of 2021. The eruption of the pandemic saw business and finance plummeting and millions of people worldwide losing their source of livelihood. Stock markets went down by 40%. The only silver lining out there was cryptocurrencies. Anxiety pervaded financial echelons across the globe as a turbulent global economy struggled to keep afloat. Cryptocurrencies, however, looked aloof from the fall and emerged as the savior for the investors.

Since their inception, cryptocurrencies have positively influenced how financial markets conduct their affairs, setting new standards.

Relationship between crypto and traditional financial assets

Humans and institutions have a tendency to oppose anything uncommon to the prevalent stuff. There was a time when banks and other traditional financial institutions showed a clear antipathy for anything related to crypto. However, later realizing that crypto is here to stay and acknowledging its positive influence on the financial system, there have been instances when conventional institutions and crypto-based enterprises worked together.

There have been differing opinions regarding the effect of cryptocurrency price movements on stock prices. According to a recent report by DSB, a giant banking institution in Singapore, growth in Bitcoin affects stock markets during big price moves.  The report titled 'Shifting cross-asset correlation' combined data from November 2020 and Bitcoin movements in the last few months. During these periods, the study discovered that when Bitcoin experienced significant growth, there was a positive correlation with S&P 500 futures.

Another study by Abakah and Rojo, conducted in 2020 to examine the bidirectional associations between cryptocurrencies and stock markets, concluded that cryptocurrencies are dissociated from the mainstream financial asset classes. This study used six major cryptocurrencies and six stock markets to check for cointegration between these markets.

Payments

Cryptocurrencies have reduced the need for third parties like banks when making payments. Along with eliminating the intermediaries, people flock to cryptocurrencies as they provide a faster, cheaper, and more efficient way to make transactions. Unlike before, people do not have to wait days for their transactions to be approved and sent to the desired person.

Following the pandemic, online retail sales surged by 14.4% to about $794 billion in 2020. As people stayed indoors, digital peer-to-peer (P2P) apps replaced cash in their day-to-day lives. Many people were willing to take payments in cryptocurrencies. To cater to all users' needs, many online stores were forced to add cryptocurrencies as additional methods of payment.

Loans and savings

As the decentralized finance (DeFi) ecosystem grows, crypto loans and savings products are increasingly gaining traction. Crypto saving accounts offer a higher return yield than conventional modes, with some accounts offering investors earnings of up to 40% APY. On the other hand, crypto lending platforms allow users to access funds while allowing the lender to profit from the loans. It is worth noting that the borrowing process is less tedious and hostile to the borrower. To get a loan, people no longer have to provide their debt-to-income ratio, credit score, and homeownership status.

Fundraising processes

Cryptocurrencies have also changed how projects raise money. Offering a faster and more transparent way to raise money makes the crypto ecosystem-making process more acceptable to investors and fund seekers. All project owners need to do is choose a funding process, the platform, and a launchpad for their project. Crypto fundraising processes typically include a private sale funding round, an Initial Exchange Offering (IEO), an Initial Coin Offering (ICO), or a Security Token Offering (STO).

Connecting to the international market

Operating in international markets has always been beset with barriers. Firstly, exchanging foreign currencies for local currencies was a struggle given the different exchange rates. Moreover, time was always a discouraging factor. Sending payments across the border was quite expensive as well. Thanks to cryptocurrencies, businesses can now conduct faster and more secure transactions. They can make trustless transactions, meaning the parties involved don't need to know or trust each other.

Wrapping up

Cryptocurrencies have come a long way in carving a niche for themselves as far as finance is concerned. While these are still in the early stage of development, the impact they have made is nothing less than phenomenal. The usage of cryptocurrencies is diverse enough to influence users' daily activities and alter how people handle various factors of their finances, such as savings, loans, payments, and others. The relationship between cryptocurrencies and mainstream finance is steadily growing and will be more evident in the coming years.