IMF: Crypto assets are no longer on the fringes of the financial system, and the simultaneous volatility of stocks poses risks to financial stability

On January 12, the International Monetary Fund (IMF) pointed out in its latest report that crypto assets are no longer on the fringes of the financial system.

The increased and sizable linkage between the cryptocurrency market and the stock market indicates the growing interconnectedness between these two asset classes, which could soon pose risks to financial stability, especially in countries with widespread cryptocurrency adoption .

The IMF noted that prior to the pandemic, cryptoassets such as bitcoin and ethereum had little correlation with major stock indices, and they were seen as helping to spread risk and as a hedge against volatility in other asset classes.

However, that changed following the central bank's response to the Covid-19 outbreak in early 2020. Both cryptocurrency prices and U.S. stocks surged amid easing global financial conditions and increased investor risk appetite. In 2017-2019, Bitcoin's returns did not move in a specific direction with the S&P 500, their daily changes were only correlated with a coefficient of 0.01, but as assets rose or fell in tandem, the metric was more likely to move in 2020-2021 The year jumped to 0.36. The IMF believes that a comprehensive and coordinated global regulatory framework should be adopted to guide national oversight and mitigate financial stability risks posed by the crypto ecosystem.