IMF flags rising correlation between cryptocurrencies and Asian stock markets

A rising correlation between crypto markets and Asian equities has prompted concern and calls for further regulation, говорится in the IMF report.

Economists noted that before the COVID-19 pandemic in Asia there was a strong divide between digital assets and the traditional market overall. The IMF maintains that growing integration of cryptocurrencies into the broader financial system creates certain risks.

“Contagion may spread through individual or institutional investors who own both cryptocurrencies and traditional financial assets or liabilities,” the report says.

Experts warned that large losses in digital assets could trigger portfolio rebalancing, which in turn would lead to volatility in financial markets or defaults on traditional obligations.

They noted that the price co-movement between regional stock indices and crypto assets such as Bitcoin and Ethereum has strengthened. As an example, economists cite India, where the correlation between the returns on digital gold and stock markets rose tenfold during the pandemic.

“Key factors behind the strengthening of the link between crypto and traditional markets in Asia may include growing adoption of crypto-related platforms and investment instruments on exchange- and over-the-counter markets or […] rising adoption of cryptocurrencies by retail and institutional investors,” the authors of the report said.

They urged local authorities to establish clear guidelines for regulated financial institutions. In their view, they should inform and protect retail investors, and coordinate their efforts more closely across jurisdictions.

In early 2022, IMF economists warned of the risks of contagion between stock markets and bitcoin.

Earlier in July, the organisation concluded that massive sell-offs in the crypto market led to limited consequences for the broad financial system.

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