What does the price of bitcoin have to do with that of Apple or Tesla shares? According to an IMF report, more than it might seem: the price of cryptocurrencies is increasingly aligning with stock markets, which poses new risks on the horizon.
At study, conducted by Tobias Adrian, Tara Iyer, and Mahvash S. Qureshi, the IMF stresses that the value of crypto assets rose to 3 billion dollars which totaled last November compared to 620,000 million dollars in 2017. A growth driven by the popularity of cryptocurrencies among both private and institutional investors, despite its high volatility.
Before the pandemic, crypto assets like bitcoin and ethereum seemed to show little correlation with major stock indices.
In fact, cryptocurrency advocates have long argued that bitcoin and other digital assets, being an asset class unlike any known to date, could act as a hedge against wild swings in other areas of the markets. financial.
But, according to the IMF study, the situation changed following the crisis responses of central banks in early 2020. The prices of cryptocurrencies and US equities soared amid global financial conditions and increased risk appetite. of investors.
To illustrate this, IMF experts emphasize that bitcoin returns did not move in any particular direction that could resemble the evolution of the S&P 500 index between 2017 and 2019.
The 60-day correlation coefficient for daily moves (a metric ranging from -1 indicating moving in opposite directions to 1 showing absolute correlation) was a mere 0.01.
However, that figure shot up to 0.36 between 2020 and 2021, a sign that both assets evolved in a more synchronized way, rising or falling in price at the same time.
In fact, IMF experts point out that the correlation between the price of bitcoin and shares has become stronger than that already studied between shares and other assets such as gold or the main currencies.
And that means, according to the IMF study, that the level of diversification of a portfolio when investing in bitcoin is somewhat more limited than previously perceived.
“There is more correlation than some would like between the cryptocurrency sector and more traditional markets“, he stated to Reuters this Tuesday Jack McDonald, CEO of Standard Custody, a company that deals with digital asset custody solutions for institutional investors.
However, not everyone agrees.
The general idea behind bitcoin is that it can act as a hedge against inflation. However, the cryptocurrency is down more than 30% from its all-time high in mid-November, while inflation has risen to almost its highest level in the last 40 years, both in the United States and in Spain.
Meanwhile, the S&P500 index has remained practically flat during that time and, on the other hand, gold – which performs well in times of monetary regime changes – has advanced around 6% in the same period.
The global market strategist of JPMorgan Asset Management, Gabriela Santos, recently pointed out in a podcast of Seeking Alpha that cryptocurrencies have a “super unstable” correlation with other assets, stating that it is difficult to imagine what the returns will be like given their high volatility.
A multi-million dollar contagion effect
The IMF analysis examines prices and volatility among cryptocurrencies and global stock markets, and suggests that bitcoin returns and volatility spillovers to stock markets, and vice versa, have increased significantly in the last two years compared to the period from 2017 to 2019.
In other words, a sharp drop in the price of bitcoin it can unleash investors’ risk aversion and end up causing a fall in traditional stock markets.
In fact, the study argues that the volatility of bitcoin explains about a sixth of the volatility of the S&P500 during the pandemic, and about a tenth of the variation in the returns of said index. And the contagion in the reverse direction – from the S&P500 to bitcoin – is usually, according to the study’s authors, of a similar magnitude.
Given signs of increased correlation between bitcoin and stock market returns, some experts have recommended in recent weeks to focus on other cryptocurrencies. From the IMF they warn that they have observed a similar behavior in the stablecoins, ‘tokens‘ created with the aim that its value remains stable, so it is linked to other assets.
The study highlights that the indirect effects of tether on global equity markets also increased during the pandemic, although they remain considerably smaller than those of Bitcoin, explaining between 4% and 7% of the variation in returns and volatility. of US equities.
Many specialists have valued this new trend of cryptocurrencies to equip themselves with traditional markets, such as Carsten Menke, director of Next Generation Research at Julius Baer.
Menke recognized a few weeks ago in bag mania that “when risk is taken into account, the difference with traditional assets is reduced and the advantage is much smaller.
Although the value of cryptocurrencies has increased considerably in recent years, We believe that the potentially disruptive power of decentralized finance could offer much more potential in the long run.”
“We believe that cryptocurrencies are only suitable for investors who have the ability and willingness to take the related risks“, he added.
A global framework to mitigate risks
The study points out that the crypto assets are no longer outside the financial system, given its volatility, relatively high valuations, and increasing financial stability, especially in countries where cryptocurrency adoption is widespread.
In this way, from the IMF they think that the time has come to “adopt a global and coordinated regulatory framework that guides national regulation and supervision and mitigates the risks for financial stability derived from the ecosystem of cryptocurrencies”.
“Such a framework should encompass regulations tailored to the main uses of crypto assets and set clear requirements for financial institutions regulated in relation to their exposure and commitment to these assets”, they add from the IMF.
This article was published in Business Insider Spain by Iván Cáceres.