Bitcoin and other crypto have grown from an obscure asset class with few users to a crucial element of the digital asset revolution, sharing the same market prices as stocks. As a result, this is sparking concerns about financial stability.
In a blog post titled ‘Crypto Prices Move More in Sync With Stocks, Posing New Risks’, the International Monetary Fund (IMF) revealed crypto’s increasing link with equity markets will pose significant dangers to financial stability.
“Stronger correlations suggest that Bitcoin has been acting as a risky asset. Its correlation with stocks has turned higher than that between stocks and other assets such as gold, investment-grade bonds, and major currencies, pointing to limited risk diversification benefits in contrast to what was initially perceived”, the IMF states.
Cryptocurrencies as an asset class rose to about $3 trillion last year, but a huge selloff has reduced their total market worth to around $2 trillion since then. Since hitting all-time highs in the fall, both Bitcoin and Ethereum have been in bear markets. Despite this, the market capitalisation of cryptocurrency has nearly quadrupled since 2017, from $620 billion to $2 trillion.
IMF suggests that now is the moment to develop a comprehensive, coordinated global regulatory framework to guide national legislation and supervision, as well as alleviate the financial stability concerns posed by the crypto ecosystem.
A framework like this would include laws targeted to the most common uses of crypto assets, as well as clear requirements for regulated financial institutions’ regarding their exposure and involvement with these assets. Furthermore, data gaps generated by the anonymity of such assets and restricted worldwide standards must be quickly filled in order to monitor and comprehend the rapid advancements in the crypto ecosystem and the risks they pose.
According to the IMF, “our study implies that crypto assets are no longer on the periphery of the financial system.”
The rising and significant co-movement and spillovers between the crypto prices and stocks markets show growing connectivity between the two asset classes, which allows the transmission of shocks that is able to disrupt financial markets.
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