IMF: Bitcoin is maturing, developing as "an integral part of the digital asset revolution"

A new study by the International Monetary Fund argues that crypto assets are no longer on the fringes of the financial system, raising concerns about financial stability.

Cryptocurrencies are no longer an obscure asset class in the financial ecosystem, but growing correlation with stock markets has weakened Bitcoin (BTC) and other cryptocurrencies, according to a new study by the International Monetary Fund (IMF) "investment hedging" role.

A blog post accompanying the survey highlights new risks associated with the growing interconnectedness between digital assets and financial markets. The article, written by Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department, and Tara Iyer, an economist, and Mahvash Qureshi, Deputy Director of the IMF’s Research Department, said the growing correlation between cryptoassets and stocks “limits their perceived risk diversification benefits, Raising the risk of contagion across financial markets."

“Crypto-assets such as bitcoin have matured from an obscure asset class with few users to an integral part of the digital asset revolution,” the article reads, adding that the shift comes with financial stability concerns.

Noting that prior to the pandemic, BTC and Ether (ETH) were rarely correlated with major stock indexes, the authors agree that cryptoassets help investors diversify their risk as a hedge against volatility in other asset classes. “But that changed following the extraordinary crisis response of central banks in early 2020,” the authors wrote, adding that cryptocurrencies and stocks have soared hand in hand as investors’ risk appetite grew.

The correlation coefficient between BTC and the S&P 500 has jumped 3,600%, from 0.01 to 0.36 after April 2020. That means the two asset classes have risen and fallen more closely since the start of the coronavirus pandemic.

With stronger correlations, bitcoin is also more risky, IMF experts say. The growing interconnectedness between cryptocurrencies and stock markets will allow for the transmission of shocks that could destabilize financial markets. Noting that crypto assets are no longer on the fringes of the financial system, the authors concluded:

“Given their relatively high volatility and valuations, their increased co-movement could soon pose a risk to financial stability, especially in countries with widespread cryptocurrency adoption.”

The experts further called for a coordinated global regulatory framework “to guide national regulation and oversight and mitigate financial stability risks from the cryptocurrency ecosystem.”

Last month, IMF chief economist Gita Gopinath made a similar call for a global policy on cryptocurrencies. She believes that if countries were to ban cryptocurrencies, they would have no control over offshore exchanges that are not subject to their own regulations.