IMF Economists Warn Of The Correlation Between Stock Markets and BTC

A few IMF economists warned of the correlation between stocks and crypto such as Bitcoin because they could pose risks to financial stability as we are reading more in today’s Bitcoin latest news.

The price correlation between stocks and crypto is slowly increasing and this poses a risk to countries that have a heavy crypto adoption according to IMF economists. For about a decade, BTC and other cryptos were treated as hedges against other types of assets but after COVID, the prices of crypto are only increasing and mirror equities as more people add risks to their portfolio. This could signal more trouble ahead according to three officials with the IMF Adrian Tobias, Mahvash Quereshi, and Tara Iyer. The economists wrote:

“The increased and sizeable co-movement and spillovers between crypto and equity markets indicate a growing interconnectedness between the two asset classes that permits the transmission of shocks that can destabilize financial markets.”

#Crypto and stocks are moving much more in sync and our latest research shows how this may be a risk to the stability of financial markets. See our latest #IMFblog for more. https://t.co/B5h2x4FPId pic.twitter.com/IvT6QwOe0e

— IMF (@IMFNews) January 11, 2022

The trio calls for a global regulatory framework to mitigate the threats to financail stability. A report from the crypto asset data company Kaiko pegged the correlation coefficient between the price of BTC and the stock indexes. These correlations range from -1 to 1 and the closer to 1 the more closely they move together. The IMF authors also noted that the correlation doesn’t extend to the US equities markets but to the developing economies as well. It places the 2021 correlation between stocks and BTC at 0.34 which is a 17x jump before.

Whereas equities markets are traditionally regulated by their host countries, most nations are still determining how to deal with crypto. While the SEC has oversight of the stock market in the US, the diversity of crypto assets and platforms, DEFI governance tokens, and stablecoins all have different utilities and it leaves the sector without a single regulatory authority. Tobies noted that cryptocurrencies are gaining ground and wrote that the analysis only suggests that crypto assets are no longer on the fringe of the financial systems. The post also veers away from being prescriptive but they argue that regulatory frameworks should include requirements for banks on their crypto exposure. If not, they warn that the increased correlation between crypto and stocks could pose a risk to financail stability in countries with widespread crypto adoption.
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