Why Imf Thinks Cryptocurrencies Could Destabilise Financial Markets

Crypto assets are no longer shielding digital investments, and the International Monetary Fund is concerned that they now have the potential to destabilize financial markets. In a blog post on January 11, the International Monetary Fund noted that cryptocurrency prices are now moving in tandem with the stock market, and cannot be considered a hedge for investment portfolios.

Tobias Adrian and Mahfash Qureshi of the International Monetary Fund’s Department of Money and Capital Markets, and Ayre, who works in the Department of Financial and Monetary Markets, wrote in a blog post, “The increased and significant joint movement and spillovers between the cryptocurrency and equity markets indicates the increasing interdependence between the two categories assets that allow the transmission of shocks that can destabilize financial markets.”

Among the main concerns highlighted by the IMF is that these assets are widely traded by individuals and institutions who “lack strong operating practices, governance and risk”. The International Monetary Fund noted that there is “inadequate disclosure and oversight” in the crypto space and this could be dangerous for clients.

The economic trio are calling for a comprehensive global regulatory framework to combat any potential instability that could be caused by the now $2 trillion industry that is growing day by day. They recommend a framework that entails the requirements of banks – regarding how they interact with digital assets such as crypto.

“This framework should include regulations designed for the primary uses of crypto assets and set clear requirements for regulated financial institutions regarding their exposure and handling of these assets,” Qureshi said in the blog.
Prior to the pandemic, major cryptocurrencies such as Bitcoin and Ethereum showed little or no correlation with major stock indices. Bitcoin yields did not move in the direction of the US S&P stock index during the 2017-2019 period. The correlation coefficient during that time for Bitcoin and Standard & Poor’s was only 0.01.

According to a recent report from crypto asset data company Kaiko, the correlation coefficient between the price of bitcoin and the S&P 500 stock index has moved to 0.61. The correlation between the price of Bitcoin and the Nasdaq is 0.58. The closer the correlation coefficient is to 1, the more the asset prices will move together.

The IMF authors also point out that the correlation extends not only to the US stock market, but also to various developing economies. The MSCI (Morgan Stanley Capital International) Index of Emerging Markets and Bitcoin came in at 0.34 from 2020 to 21, 17 times more than in previous years.