- The International Monetary Fund said on Tuesday that bitcoin and stocks are increasingly moving choppy and this poses risks to financial stability.
- Bitcoin’s volatility accounts for about one-sixth of the S&P 500’s volatility during the pandemic.
- Crypto assets showed little correlation with major stock indices before the pandemic.
The International Monetary Fund said on Tuesday that bitcoin and US large-cap stocks are moving more in tandem with each other since the COVID-19 crisis and that the close correlation points to risks to financial stability.
“Our analysis indicates that crypto assets are no longer on the fringes of the financial system,” the IMF said in a blog post highlighting the relationship that bitcoin to the S&P 500’s rise has turned higher among stocks and other long-standing asset classes such as gold. Major currencies and investment grade bonds.
The stronger correlations indicate that the world’s most valuable cryptocurrency has been acting as a risky asset.
The correlation coefficient for daily movements was just 0.01 between 2017 and 2019, long before the coronavirus outbreak. However, “this measure jumped to 0.36 in 2020-2021 as assets moved the most, rising together or declining together,” the institution said.
The volatility in the digital currency, which is worth $812 billion as of Tuesday, explains about one-sixth of the S&P 500’s volatility during a pandemic, and it’s about a tenth of the variance in S&P 500 returns.
“As such, a sharp drop in the price of Bitcoin can increase investors’ risk aversion and lead to a decrease in investment in the stock markets. The indirect effects in the opposite direction, that is, from the S&P 500 to Bitcoin—are an average of Similar magnitude, suggesting that sentiment in one market is transmitted to the other in a non-intuitive way.”
Bitcoin, ether and other crypto assets showed little correlation with major stock indices before the pandemic. But the prices of cryptocurrencies and US stocks alike rose as risk appetite increased among investors after central banks around the world launched unprecedented levels of financial support to mitigate the impact of the health crisis.