According to new International Money Fund (IMF) research, Bitcoin (BTC) and other cryptocurrencies are no longer an obscure asset class within the financial ecosystem, but their “investment hedge” role eroded by an increasing correlation with the stock market.
New hazards related to the rising interconnection of virtual assets and financial markets highlighted in a blog post that goes along with the survey. The article claims that the increasing correlation between crypto-assets and stocks “limits their perceived risk diversification benefits and raises the risk of contagion across financial markets,” as written by IMF Monetary and Capital Markets Department director Tobias Adrian, economist Tara Iyer, and Research deputy division chief Mahvash S. Qureshi.
“Crypto-assets like Bitcoin have evolved from an obscure asset class with few users to a vital part of the digital asset revolution,” according to the article, which also noted that this change comes with financial stability worries.
Bitcoin (BTC) and Ether (ETH) had no correlation with major stock indexes prior to the epidemic. However, the authors concluded that crypto-assets helped investors diversify risk. By acting as a hedge against volatility in other asset classes. “However, this changed with the exceptional central bank crisis responses of early 2020”. The article says, adding that as investors’ risk appetite grew, crypto and equities rose in tandem.
Greater risks for Bitcoin
After April 2020, the correlation coefficient between BTC and the S&P 500 index increased by 3,600%, from 0.01 to 0.36. As a result, since the coronavirus outbreak, the two asset classes have been growing and declining in lockstep.
According to analysts at the International Monetary Fund, stronger connection means greater risks for Bitcoin. The rising interconnection of cryptocurrency and stock markets could allow shocks to be transmitted to financial markets, potentially destabilising both. The authors summarised by saying that crypto assets are no longer on the outskirts of the financial system:
“Given their relatively high volatility and values, their rising co-movement could represent a threat to financial stability in the near future. Particularly in nations where crypto usage is popular.”
The experts also urged for a global regulatory framework that would “guide national legislation and oversight. While mitigating the financial stability concerns posed by the crypto ecosystem”.
IMF Chief Economist Gita Gopinath made a similar proposal for a worldwide crypto strategy last month. She stated that if governments outlaw crypto, they will lose control of offshore exchanges. That are not governed by national laws.