It has been reported that a survey highlights new risks associated with the growing interconnectedness between digital assets and financial markets. Penned by IMF Monetary and Capital Markets Department director Tobias Adrian and economist Tara Iyer as well as research deputy division chief Mahvash Qureshi, 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.”
However, the article read:
“Crypto assets such as Bitcoin have matured from an obscure asset class with few users to an integral part of the digital asset revolution.”
The report said that noting that BTC and Ether (ETH) rarely correlated with major stock indexes before the pandemic, the authors agreed that crypto-assets helped diversify risk for investors by acting as a hedge against swings in other asset classes.
The authors wrote:
“But this changed after the extraordinary central bank crisis responses of early 2020.”
Likewise, the correlation coefficient between BTC and the S&P 500 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 began.
According to IMF experts, with stronger correlation comes greater risks for Bitcoin. The growing interconnectedness between crypto and equity markets would permit the transmission of shocks that can destabilize financial markets.
The authors summarized:
“Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption.”
The experts further called for a coordinated global regulatory framework “to guide national regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem.”
Thus, last month, IMF chief economist Gita Gopinath made a similar call for a global policy regarding crypto. She argued that if countries were to ban crypto, then they would not have any control over offshore exchanges that are not subject to their country’s regulations.