Cryptocurrency is no longer an unknown asset class in the financial ecosystem, but its increasing correlation with the stock market is undermining its role as an “investment hedge” for Bitcoin (BTC) and other cryptocurrencies, according to a new study by the International Monetary Fund (IMF). ).

The blog post accompanying the survey highlights new risks associated with the growing relationship between digital assets and financial markets. An article written by Tobias Adrian, director of the IMF’s Money and Capital Markets Department, and economist Tara Ayer and deputy research assistant Mahwash Qureshi, argue that the increased correlation between cryptocurrencies and stocks “limits the benefits of perceived risk diversification and increases contagion risks in financial markets.”

“Crypto assets like bitcoin have gone from being an unknown asset class with few users to being an integral part of the digital asset revolution,” the article says, adding that the transition is fraught with concerns about financial stability.

The authors note that before the pandemic, when BTC and Ether (ETH) were rarely correlated with major stock indices, the authors agreed that cryptocurrencies help diversify risks for investors by acting as a hedge against fluctuations in other asset classes. “But that all changed after the central bank’s extraordinary response to the crisis in early 2020,” the authors wrote, adding that cryptocurrencies and stocks went hand in hand with investors’ growing appetite for risk.

The 60-day correlation coefficient between Bitcoin and the S&P 500. Source: International Monetary Fund.
The correlation coefficient between BTC and the S&P 500 jumped 3600% and fell from 0.01 to 0.36 after April 2020. This means that since the start of the coronavirus pandemic, the two asset classes have been closer together in an up and down movement.

Related: What should the crypto industry expect from regulators in 2022? Expert’s answer, part 1

According to IMF experts, with a stronger relationship, there is a greater risk to bitcoin. The growing connection between the cryptocurrency and stock markets will allow the transmission of shocks that can destabilize financial markets. The authors note that cryptocurrencies are no longer on the fringes of the financial system, and summarize the following:

“Given its relatively high volatility and valuation, its increased co-op movement could soon pose a risk to financial stability, especially in countries where crypto is prevalent.”
The experts also called for the creation of a coordinated global regulatory framework “to guide national regulation and oversight and mitigate risks to financial stability associated with the cryptocurrency ecosystem.”

Last month, Gita Gopinath, chief economist at the International Monetary Fund, issued a similar call for global crypto policy. She said that if countries ban cryptocurrencies, they will have no control over foreign exchanges that are not subject to the rules of their own country.

Source: CoinTelegraph