The International Monetary Fund says crypto currencies’ high volatility and valuation, as well as their increasing co-movement with equity markets will soon pose risks to financial stability in countries with widespread crypto adoption.
The IMF disclosed this in a blogpost titled, ‘Crypto Prices Move More in Sync With Stocks, Posing New Risks’, on Tuesday.’
According to the Chainalysis’ 2021 Global Crypto Adoption Index, Nigeria is the sixth leading country in the world in terms of cryptocurrency adoption. Vietnam, India, and Pakistan are the top three countries.
IMF said in the latest post that crypto assets were no longer on the sidelines of the financial system, adding that there was an increasing and sizable co-movement between crypto and equity markets that could cause shock, destabilising financial markets.
It disclosed that the stronger association between crypto and equities was apparent in emerging market economies, most of which are leading in crypto-asset adoption.
The fund said, “The increased and sizable 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 destabilise financial markets.
“Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption.”
According to the IMF, crypto assets such as bitcoin have matured to become an integral part of the digital asset revolution, raising financial stability concerns.
The Washington-based lender said, “Before the pandemic, crypto assets such as bitcoin and ether showed little correlation with major stock indices. They were thought to help diversify risk and act as a hedge against swings in other asset classes.
“But this changed after the extraordinary central bank crisis responses of early 2020. Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.”
It said, “Increased crypto-stocks correlation raises the possibility of spillovers of investor sentiment between those asset classes. Indeed, 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.”