Crypto prices start Mirroring stock market, IMF analysts concerned about potential risks

Cryptocurrencies have evolved from relatively unknown to an integral part of the digital asset revolution. This sudden rise in society has created some concerns regarding financial stability.

In an article on the IMF blog site, analysts have stated that:

“Crypto assets are no longer on the fringe of the financial system.”

The market value for these assets rose to almost $3 trillion in November from $620 billion in 2017. However, over the past few days, the combined market cap decreased to about $2 trillion.

Following crypto’s adoption into the mainstream, its correlation with traditional holdings has increased. This closer correlation between crypto and thing like stocks have given the new assets a lower perceived risk.

Before the pandemic, assets such as Bitcoin and Ether showed little correlation with major stock indices. This could be seen as a positive for crypto as it would help diversify risk and act as a hedge against swings in other assets. However, due to the central bank crisis responses, crypto and stocks soared amid easy global financial conditions and greeted investor risk appetite.

Before the pandemic, crypto-assets such as Bitcoin and Ether showed little correlation with major stock indices. They were thought to help diversify risk and act as a hedge against swings in other asset classes. But this changed after the extraordinary central bank crisis responses of early 2020. Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.

This increased correlation raises the likelihood of spillover of investor mindsets between the two asset types. Analysts from IMF report that correlations between Bitcoin and the stock market have risen significantly in 2020-2021 as compared to 2017-2019.

These analysts infer that crypto-assets are quickly becoming more integrated into global financial streams and the increased co-movement with traditional holdings could pose risks to overall financial stability. Due to these risks experts have clamored for a global regulatory framework regarding these new-age assets.

Source: International Monetary Fund