Crypto’s Growing Correlation With Asian Equities Poses Financial Stability Risks: IMF
Since the onset of the Covid-19 pandemic in March 2020, cryptocurrencies such as bitcoin (BTC-USD) and ethereum (ETH-USD) have been increasingly integrated into the Asian financial system, highlighting the need for further regulation, the International Monetary Fund said in a statement. recent blog Publish.
Returns and volatility correlations between cryptos and Asian equities were low before the pandemic, but they have increased significantly since 2020, thanks to easy access to cheap borrowing via low interest rates alongside stimulus payments. of the government. The return correlations of bitcoin (BTC-USD) and Indian stock markets, for example, increased 10-fold during the pandemic, “suggesting limited risk diversification benefits of crypto,” the IMF wrote.
In some context, bitcoin (BTC-USD), the largest digital token by market capitalization, has seen a wild rally since the start of the pandemic until its peak in November 2021. Meanwhile, its price has surged over 1,000% to an all-time high of $68.9,000. But as central banks like the Federal Reserve and European Central Bank tighten monetary policy to ease inflationary pressures, bitcoin lost much of those gains, up 302% to $20.64K on Friday after -midday. Although high compared to pre-pandemic levels, the magnitude of BTC’s persistent slump suggests that traders’ risk appetite is shrinking as fiscal support wanes.
Overall, the heightened relationship between cryptos and Asian equities poses certain risks to financial stability, the IMF has warned.
“While the financial sector appears to have been insulated from these sudden moves, that may not be the case in future boom and bust cycles,” said the agency, which is open to the idea that digitalization can promote financial inclusion. “The contagion could spread through individual or institutional investors who may hold both crypto and traditional financial assets or liabilities.”
The IMF said that one of the causes of the growing interconnectedness of Asian crypto and equity markets could be the potentially growing acceptance of crypto-focused investment platforms and vehicles in the stock market. Another reason could be the strong growth in adoption of crypto by retail and institutional investors in Asia, he said.
There was also a sharp increase in the fallout from crypto-equity volatility in India, Vietnam and Thailand, signaling “a growing interconnectedness between the two asset classes that allows the transmission of shocks that can impact financial markets”, according to the IMF’s spillover methodology developed in its January note on global financial stability.
In turn, Asian authorities have focused more on crypto-related regulation, as regulatory frameworks are already in the works in several countries, including India, Vietnam and Thailand, the IMF said. Towards the end of March, Thailand blocked the use of digital tokens as a form of payment, citing risks evolving around the emerging space, including price volatility, cyber theft and money laundering.
India, meanwhile, has been very vocal about cracking down on the crypto industry over the past year to protect consumers. In fact, crypto trading volumes in the country plummeted after its digital asset tax laws took effect in April.
Previously (August 22), crypto liquidity began to recover as the market capitalization of stablecoins stopped falling.