Rising correlation between stocks and cryptocurrencies creates risks to financial stability in economies friendly to digital assets. The IMF economists’ report reaches this finding.
#Crypto and stocks are moving much more in sync and our latest research shows how this may be a risk to the stability of financial markets. See our latest #IMFblog for more. https://t.co/B5h2x4FPId pic.twitter.com/IvT6QwOe0e
— IMF (@IMFNews) January 11, 2022
Experts noted that the strengthening of price alignment between the two asset classes intensified during the COVID-19 pandemic. Since its onset, more investors have been adding cryptocurrencies to portfolios, viewing them as a hedge against stock declines, specialists said.
“The increased correlation and secondary effects between crypto- and stock markets […] allow shocks to be transmitted that could undermine financial stability. Our analysis shows that digital assets are no longer on the periphery of the financial system”, the report notes.
Secondary effects tend to intensify during periods of volatility. For example, during market turmoil in March 2020 or during sharp swings in the cryptocurrency market in early 2021.
Analysts at Kaiko estimated the 30-day average correlation between Bitcoin and the S&P 500 at 0.61, and between digital gold and the Nasdaq Composite at 0.58. The values reached their highest since July 2020.
Bitcoin’s correlation with the S&P 500 and Nasdaq reached its highest level since July of 2020.
In our latest analysis, we explore the extent of the latest sell-off, #DEX trade volume, neutral funding rates, and much more.https://t.co/N76v4djPpz
— Kaiko (@KaikoData) January 10, 2022
IMF officials stressed that there is a link between price moves and the stock markets of developing economies. The correlation with the MSCI EM index over 2020–2021 stood at 0.34, a 17-fold rise compared with the previous reporting period.
The authors called for a global regulatory framework to mitigate such a threat.
They stressed that the document should include requirements for banks regarding their access to and interaction with the new asset class. To monitor the rapid development of the crypto ecosystem and understand the associated risks, it is necessary to close gaps in cryptocurrency anonymity and the limits of global standards.
In May 2021, DBS analysts discovered that the correlation between Bitcoin and S&P 500 futures increased following intensified price swings in the first cryptocurrency.
In October, MSCI warned about the growing influence of cryptocurrencies on the dynamics of securities portfolios.
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