The risk sentiments of bitcoin has spilled over into the stock market, according to the International Monetary Fund (IMF), as the most popular cryptocurrency and equity trade now walk hand-in-hand.
IMF stated that the adoption of bitcoin has grown in the same fashion with the stocks between 2020-21, against the assets class era of 2017-19, with both serving as an hedge against depreciation in other asset classes.
This shows the investors sentiment in both assets markets are spilling over, affecting their growth, “For instance, returns on Bitcoin did not move in a particular direction with the S&P 500, the benchmark stock index for the United States, in 2017–19.
“The correlation coefficient of their daily moves was just 0.01, but that measure jumped to 0.36 for 2020–21 as the assets moved more in lockstep, rising together or falling together.” Tobias Adrian, Tara Iyer and Mahvash S. Qureshi wrote in IMF research report received by The Agnes Isika Blog.
It was understood that both the equity market and bitcoin are now interconnected and raises the risk of contagion across financial markets, a situation that worries the IMF.
Easy global financial conditions and greater investor risk appetite were said to have aided the correlation, more than stocks interconnected with other assets such as gold, investment grade bonds, and major currencies.
“our analysis, which examines the spillovers of prices and volatility between crypto and global equity markets, suggests that spillovers from Bitcoin returns and volatility to stock markets, and vice versa, have risen significantly in 2020–21 compared with 2017–19.” IMF stated.
Using the influence of bitcoin on U.S stock market volatility and returns, IMF research discloses, “a sharp decline in Bitcoin prices can increase investor risk aversion and lead to a fall in investment in stock markets.”
The global fund body said that sentiment in one market is transmitted to the other in a nontrivial way, hence, spillover from the stock market to bitcoin trade could have a similar magnitude.
Giving example of such spillover episodes, IMF suggested March 2020 market turmoil or during sharp swings in Bitcoin prices which was observed early last year.
The trio wrote that the interconnectedness between the stocks and crypto – using Tether as another digital asset example – can destabilize financial markets, and “increased co-movement could soon pose risks to financial stability especially in countries [emerging economies] with widespread crypto adoption.”
IMF suggested in its research report that the interconnectedness makes it necessary for countries to now adopt a “comprehensive, coordinated global regulatory framework to guide national regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem.”
