The International Monetary Fund (IMF) has said cryptocurrencies have become a popular asset among institutional investors, but extreme price volatility has raised concerns about their financial stability.
According to the latest report, analysis suggests that crypto and equity markets have become increasingly interconnected across economies over time.
IMF economist Tara Iyer said that “crypto assets such as Bitcoin have matured from an obscure asset class with few users to an integral part of the digital asset revolution”, adding this transition comes along with financial stability concerns.
She noted overspills from the price volatility of Bitcoin to the S&P 500 and MSCI emerging markets indices have increased by about 12 to 16 percentage points since the onset of the Covid-19 pandemic, while those from its returns have increased by about eight to 10 percentage points.
“Spillovers from the most traded stablecoin, Tether, to these indices have also increased by about four to six percentage points,” Iyer said.
In absolute terms, the overspills from Bitcoin to global equity markets are significant, explaining about 14% to 18% of the variation in equity price volatility and eight to 10% of the variation in equity returns.
These findings, claims the IMF, suggest that close monitoring of crypto asset markets and the adoption of appropriate regulatory policies are warranted to mitigate potential financial stability risks.
However, IMF financial counsellor Tobias Adrian recently claimed that since central banks slashed interest rates to near zero to support economies during the pandemic, there has been increased co-movement and overspills between crypto and equity markets.
“The increased and sizeable 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,” Adrian said.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.