The latest cryptocurrency to hit the scene is Bitcoin and its success has begun a new age of digital assets that will change how we live our lives.
The “cryptocurrency correlation with other assets” is the most important factor that Bitcoin has developed into an integral part of the digital asset revolution.
According to recent International Money Fund (IMF) study, cryptocurrency is no longer a niche asset class inside the financial ecosystem, but a rising connection with the stock market undermines the function of Bitcoin (BTC) and other cryptocurrencies as “investment hedging.”
The survey’s blog post outlines additional dangers brought on by the expanding connections between virtual assets and financial markets. The article claims that the rising correlation between crypto assets and stocks “limits their perceived risk diversification benefits and raises the risk of contagion across financial markets.” It was written by Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, along with economist Tara Iyer and Mahvash S. Qureshi, deputy division chief of Research.
The report said that “Crypto assets like Bitcoin have developed from an obscure asset class with few users to a vital element of the digital asset revolution,” adding that this development is accompanied by worries about financial stability.
The authors concurred that crypto assets reduced risk for investors by serving as a buffer against fluctuations in other asset classes, despite the fact that BTC and Ether (ETH) had no correlation with major stock indices prior to the epidemic. According to the paper, “but this changed with the exceptional central bank crisis reactions of early 2020,” noting that equities and cryptocurrencies rose along as risk appetite among investors increased.
60-day correlation coefficient between Bitcoin and S&P 500 index. Source: IMF
The correlation coefficient between BTC and the S&P 500 index has jumped 3,600%, going from 0.01 to 0.36 after April 2020. This means that the two asset classes have been more closely rising and falling together since the coronavirus pandemic.
What can the cryptocurrency sector anticipate from authorities in 2022? Part 1 of expert responses
IMF analysts claim that higher correlation means more dangers for bitcoin. As cryptocurrency and equities markets become more integrated, shocks that might disrupt financial markets could be transmitted. The authors summed up by noting that crypto assets are no longer on the periphery of the financial system:
“Given their comparatively high volatility and values, their rising co-movement might soon pose challenges to financial stability, particularly in nations with substantial use of cryptocurrencies,” according to the study.
In addition, the experts urged the creation of an unified international regulatory framework “to direct national regulation and supervision and limit the financial stability risks arising from the crypto ecosystem.”
A similar request for a worldwide crypto strategy was made by IMF Chief Economist Gita Gopinath last month. She stated that if governments outlawed cryptocurrency, they would lose all control over foreign exchanges that are not governed by local laws.
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