Crypto is no longer a dark asset class within the financial ecosystem, but a growing correlation with the stock market undermines Bitcoin's (BTC) and other cryptocurrencies, according to new Research by the International Monetary Fund (IMF).
a blog post accompaniment The survey highlights new risks associated with the growing interconnection between virtual assets and financial markets. Written by the head of the IMF's Monetary and Capital Markets Department, Tobias Adrian, as well as by economist Tara Iyer and deputy head of the Research division, Mahvash S. Qureshi, the article states that the growing correlation between crypto assets and Stocks "limit the benefits of diversifying perceived risk and increase risk." contagion through financial markets ”.
"Cryptoassets like Bitcoin have gone from being an obscure asset class with few users to an integral part of the digital asset revolution," the article reads, adding that this transition is accompanied by concerns about financial stability. .
Nothing but BTC and Ether (ETH) rarely correlated with major stock indices before the pandemic, the authors agreed that crypto assets helped diversify risk for investors by acting as a hedge against swings in other asset classes. "But this changed after the extraordinary responses to the central bank crisis in early 2020," the article says, adding that cryptocurrencies and equities rose hand in hand as investors' appetite for risk grew.
The correlation coefficient between BTC and the S&P 500 Index has increased by 3600%, from 0.01 to 0.36 after April 2020. This means that the two asset classes have been rising and falling more together since the pandemic. of the coronavirus.
Related: What should the crypto industry expect from regulators in 2022? Expert Answer, Part 1
With a stronger correlation comes higher risks for Bitcoin, according to IMF experts. The growing interconnection between crypto markets and securities markets would allow the transmission of shocks that can destabilize financial markets. Noting that crypto assets are no longer on the fringes of the financial system, the authors summarized:
"Given their volatility and relatively high valuations, their larger joint move could soon pose risks to financial stability, especially in countries with widespread crypto adoption."
The experts also called for a coordinated global regulatory framework "to guide national regulation and supervision and mitigate financial stability risks arising from the crypto ecosystem."
Last month, IMF Chief Economist Gita Gopinath made a similar call for a global policy regarding cryptocurrencies. He argued that if countries were to ban cryptocurrencies, they would have no control over foreign exchanges that are not subject to their country's regulations.
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