Threat to financial stability: IMF on cryptocurrencies: Correlation between stock markets and crypto assets like Bitcoin and Ethereum increased in Asia | news

• The Asian countries are opening up to cryptocurrencies
• The correlation between cryptos and stock markets has increased significantly during the corona pandemic
• Financial stability may be affected – regulation is necessary

Developments in the crypto market are having more and more influence on the Asian stock markets. This is the conclusion of the International Monetary Fund in a post recently published on its own blog. The background is the great interest of the Asian countries in cryptocurrencies such as Bitcoin & Co. The IMF writes that no other part of the world has welcomed crypto-assets with the same open arms as Asia. Digital currencies can help create a path towards a more environmentally conscious financial system and mean improved access to the financial sector for many people. However, with the increasing acceptance of the cryptoverse, risks will also increase.

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The Corona pandemic is giving cryptocurrencies a boost

According to the IMF, the corona pandemic would have played a major role in the increased use of crypto assets. After all, millions of people would have had to stay at home while governments and central banks provided generous financial support and low interest rates made it much easier to borrow. This can also be seen from the market value of all cryptocurrencies, which grew to three billion US dollars in just a year and a half until December 2021. Meanwhile, however, the value of all cyber currencies has shrunk back to well over one billion US dollars.

The correlation between crypto market and stock market in Asia is increasing

As crypto trading increased during the pandemic, the correlation with Asian stock markets would also have increased, especially relative to the two largest cryptocurrencies by market capitalization, Bitcoin and Ethereum. According to the blog post, this applies to both returns and volatility. While the financial sector has historically seemed isolated from developments in the crypto market, a greater risk to financial stability may arise in the future. The more institutional or individual investors invest in cryptocurrencies, the greater the risk that in case of large losses in the crypto market, they will also have to hit other traditional assets to intercept them, which in turn will affect the stock markets. In this way, Bitcoin & Co. not really serve to diversify the portfolio.

As the International Monetary Fund has found, the return correlation between Bitcoin and the Indian stock market has increased tenfold during the pandemic. The volatility correlation would have tripled at the same time. In addition to India, similar effects can also be observed in Vietnam and Thailand.

Coordinated regulation necessary

For this reason, the fund supports the efforts of Asian authorities to introduce proper crypto regulation. However, the IMF also warns that there are still large data gaps that need to be filled by national and international regulators to fully understand the ownership, uses and also the intersections of cryptocurrencies with the traditional financial sector. What is needed are clear guidelines aimed at informing and protecting investors. But for such regulation to be effective, the authorities in the individual countries must work closely together and coordinate their measures well with each other.

Editor finanzen.net

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