In a recent report, the International Monetary Fund (IMF) warned that digital currencies can no longer be viewed as a hedge against market volatility, as it moves with the stock market and causes price volatility. increased risk of contagion across financial markets.
Even before the pandemic, cryptocurrencies like Bitcoin and Ethereum had almost no correlation with the stock market, but liquidity was high due to central banks’ responses to the pandemic, economists said. The pandemic and increased risk appetite among investors have caused cryptocurrencies and stock prices to rise together.
This stronger connection has limited Bitcoin’s ability to act as a hedge during market volatility as the cryptocurrency’s proponents have long touted, but instead That coin is now a risky asset.
The IMF economists said that Bitcoin did not move in a certain direction with the S&P 500 index between 2017 and 2019, with the correlation coefficient of this movement for the two indexes at that time being only at level of 0.01, but this coefficient has increased to 0.36 in the period of 2020-2021, when the above asset classes have more overlapping movements, increasing or decreasing together.
These experts say their analysis shows that spillovers between cryptocurrencies and stocks tend to increase during volatile periods in financial markets, such as March 2020, or during volatile periods. strong movements of the bitcoin price as of early 2021.
The IMF experts said that the synchronized movements of cryptocurrencies and securities “may soon pose many risks to financial stability, especially in countries with widespread adoption of cryptocurrencies”. The experts therefore call for the development of “a comprehensive and globally coordinated regulatory framework to guide regulation and surveillance at the national level, as well as reduce risks to with the financial stability that comes from the digital currency ecosystem”.
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