Amidst an uproar about cryptocurrencies in the world; “Crypto assets are no longer on the fringes of the financial system,” the International Monetary Fund, an international financial institution, said in a blog post on Tuesday. They also believe that the time has come to adopt a comprehensive and coordinated global regulatory framework to guide national regulation and supervision and mitigate the financial stability risks arising from the cryptocurrency ecosystem.
Cryptocurrencies The global cryptocurrency market cap has reached $2.04 trillion, up 4.40 percent in the past 24 hours, data from coinmarketcap.com shows.
The International Monetary Fund believes that Crypto assets like Bitcoin have matured from an obscure asset class with few users into an integral part of the digital asset revolution. Moreover, they believe it raises concerns about financial stability.
The International Monetary Fund also mentioned in its blog that despite the fluctuations, the cryptocurrency market has grown very exponentially in the past few years; In 2017, it was valued at $620 billion which rose to nearly $3 trillion in November 2021.
The IMF found in its research that despite the greater adaptation of cryptocurrencies; The correlation of crypto assets with traditional holdings such as stocks has increased significantly, “which limits the benefits of perceived risk diversification and increases the risk of contagion across financial markets,” a blog post reported.
The International Monetary Fund noted that crypto assets such as Bitcoin and Ethereum had few connections with major stock indices prior to the outbreak of COVID. They are considered to help diversify risk and act as a hedge against asset class volatility.
Before the pandemic, crypto assets like Bitcoin and Ether showed little correlation with major stock indices. It was believed to help diversify risk and act as a hedge against fluctuations in other asset classes, according to the IMF blog.
However, after the dramatic responses to the central bank crisis in early 2020, this has changed. Cryptocurrency prices and stock prices in the United States rose due to the easy global financial conditions and increased risk appetite among investors.
In emerging market economies, where many have led the way in the adoption of crypto assets, the strongest link is emerging between cryptocurrency and stocks as well, according to the International Monetary Fund.
For example, in 2020-2021, the correlation between the MSCI Emerging Markets Index and Bitcoin was 0.34, a 17-fold increase from previous years, according to the International Monetary Fund.
According to the International Monetary Fund, the strongest correlations indicate that Bitcoin has been operating as a risky asset. “Its correlation has shifted even higher between stocks and other assets such as gold, investment grade bonds and major currencies, suggesting the benefits of diversifying limited risk in contrast to what was initially envisioned.” Read the IMF blog.