Cryptocurrencies are no longer a marginal asset class in the financial ecosystem. According to a new study by the International Monetary Fund (IMF), their growing correlation with the stock market undermines the “investment hedging role” of bitcoin (BTC) and other digital assets.
The IMF points out new risks associated with the growing correlation between digital assets and financial markets in its blog post. Written by IMF Money and Capital Markets Director Tobias Adrian, economist Tara Iyer, and Deputy Head of Research Mahvash Qureshi, the article claims that the growing correlation between cryptocurrency assets and stocks “limits their perceived benefits of risk diversification and increases the risk of contagion in financial markets. The article reads:
Bitcoin and other cryptocurrency assets have evolved from an obscure asset class with a tiny user base to a vital part of the digital asset revolution.
The document also adds that this transformation goes hand in hand with concerns about financial stability.
They also added that both cryptocurrencies and stocks have skyrocketed in correlation as investors’ risk appetite has also increased.
The correlation coefficient between BTC and S&P 500 increased by 3600%. Since April 2020, it has moved from 0.01 to 0.36.
According to IMF experts, along with a stronger correlation, the risk to bitcoin is also increasing. The interconnectedness between the cryptocurrency and stock markets could destabilize the financial markets. Emphasizing that cryptocurrency assets are no longer on the fringes of the financial system, the authors concluded:
Given their relatively high volatility and valuations, their increased co-mobility may soon pose a risk to financial stability, especially in countries with the widespread adoption of cryptocurrencies.
The experts further called for the creation of a coordinated global regulatory framework “to guide national regulation and oversight and mitigate the risks to financial stability arising from the cryptocurrency ecosystem.”