Crypto Markets – Increasing Stock Market Correlation Risks Financial Stability: IMF Research

  • Cryptocurrency markets and traditional stocks and exchanges move more in sync than in previous years, IMF research has shown.
  • The study warns of the potential financial risks involved, especially for countries with high digital asset takeover.

The cryptocurrency market has seen increasing acceptance in recent years, with its global market value rising from $ 620 billion in 2017 to $ 3 trillion in November 2021. Currently, this value stands at $ 2 trillion after price correction for several weeks , but this equates to a fourfold growth since 2017.

However, new research from the International Monetary Fund (IMF) shows a greater correlation between crypto assets and the traditional financial market. The report notes that this «limits the perceived benefits of risk diversification and increases the risk of capture through financial markets.»

Prior to the pandemic, cryptocurrencies were poorly interconnected with large stock indices. The same thing happened in mid – November last year. This was useful as a risk mitigator and as a hedge against price swings in other asset classes.

However, this scenario took 180 degrees after the responses to the central bank crisis in 2020. Financial conditions became more favorable and investor appetite increased. Thus, both cryptocurrency and US stock prices were appreciated. The report uses Bitcoin and the S&P 500 stock index as an example. The correlation between the two was almost zero in 2017-2019 and rose 36 times in 2020-2021. This locking movement is also evident among crypto and equity assets from emerging market economies. For example, Bitcoin and emerging markets yielded MSCI 0.34 in 2020-2021, which is 17 times more than previous years.

Crypto Markets and Traditional Stocks Block Move

In addition, the study highlights that the crypto-stock correlation is higher than the correlation between stocks and other assets. The latter category includes assets such as gold, investment grade bonds and major currencies. According to the researchers, this suggests that «the benefits of risk diversification are limited, in contrast to what was first perceived.»

In addition, it increases the likelihood of consequences in investor sentiment across asset classes. Financial consequences occur when fluctuations in the price of one asset trigger the same thing in another asset. According to research, impacts between Bitcoin and stock markets such as the S&P 500 have increased significantly in 2020-2021, compared to 2017-2019. Researchers have observed similar behavior to stablecoins, albeit to a lesser extent than Bitcoin. Consequences, the study notes, usually occur during financial market volatility, for example in March 2020, or when Bitcoin is extremely turbulent, as early as 2021. This co-movement allows “arrangements to be transmitted. ‘may destabilize financial markets… countries with widespread crypto-acceptance. «

Study Suggestions

The investigation concludes with the following recommendation:

So the time has come to adopt a global, comprehensive and coordinated regulatory framework that will guide national regulation and oversight and mitigate the risks to financial stability posed by the cryptocurrency ecosystem.

The framework, it notes, must cover the main uses of cryptocurrencies and the regulated financial institutions that trade with them. In addition, the anonymity of the sector needs to be anonymized and data gaps need to be ‘filled’ quickly. As well as increasing oversight and understanding of the cryptocurrency sector, this will help mitigate the risks of its rapid growth.

Jean Simmons

Jean Simmons has been a cryptocurrency enthusiast since 2014 and has been dedicated to the topic on a daily basis since she first learned about Bitcoin and blockchain technology. Besides cryptocurrency, Jean studied computer science and worked for two years at a blockchain startup. At Mercayala, he is responsible for technical issues. His goal is to bring cryptocurrencies to the world in a simple and understandable way.

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