Crypto can no longer hedge your investments – POLITICO

The value of bitcoin and other cryptocurrencies moves more with market volatility in the stock market, and thus serves as a poor hedge for investment portfolios, according to the International Monetary Fund.

The International Monetary Fund disclosed its research in a blog on Tuesday, repeating last month’s calls for global regulatory action. He warned that without action, massive fluctuations in the two asset classes could amplify financial instability.

“The correlation of crypto assets with traditional holdings such as stocks has increased significantly, limiting the advantages of perceived risk diversification and increasing the risk of contagion across financial markets,” Tobias Adrian and Mahfash Qureshi, two senior officials from the fund’s capital markets, wrote in their departments. Tara Iyer, an economist who specializes in global financial stability, also contributed to the research.

The research is a blow to crypto proponents, who have touted the likes of Bitcoin as an alternative to gold to hedge against market volatility.

Cryptocurrency may have served this purpose before the outbreak of the pandemic. But the International Monetary Fund noted that bitcoin has “moved more steadily” along with stock indices, such as the S&P 500, since central banks launched massive asset-buying programs to shield their economies from the pandemic.

Bloggers write that the trend is “also visible in emerging market economies,” where cryptocurrency is much stronger.

This increased correlation between both assets gives further reason to develop a global framework for regulating and supervising crypto assets to prevent financial instability.

The staff said the “clear requirements” are particularly needed for financial companies that hold crypto assets.

The Basel Committee on Banking Supervision has already proposed slapping banks with strict cryptocurrency capital stock — criteria the European Commission said it would consider implementing.

IMF staff said the anonymous nature of crypto assets also needs to be addressed.