The IMF expressed that the cryptocurrency market reached at least $ 3 trillion in 2021. According to IMF, there is an obvious nexus between cryptocurrencies and financial markets.
The International Monetary Fund revealed on Monday, January 11, an article in its blog in which it acknowledged that the market for bitcoin and cryptocurrencies is no longer at the edges of the fields of the world financial system, and highlights that their value went from USD 620 million in 2017 to at least USD 3 trillion in November 2021.
The article argues that, although the decline in the price of bitcoin and other cryptocurrencies brought the total value of that market to around $ 2 trillion, it still cost four times its value in 2017.
Amid this age of adoption of cryptocurrencies, their correlation with traditional assets such as stocks has increased significantly, limiting the benefits of their perceived risk diversification and raising the risk of contagion in the financial market, notes the document.
Bitcoin and Stocks Show Parallelisms
The following graph shows on the left side how the Standard & Poor index and the price of bitcoin show increasingly similar trends. On the other hand, the correlation between bitcoin and S&P 500 registered a minimum of at least -0.4 in mid-2019. In March 2020, this correlation achieved an unprecedented maximum.
A report highlighted by various media outlets on Tuesday 11, stated that the correlation between bitcoin and S&P 500 had reached its highest level since July 2020 last week. In the previous two months, the correlations of bitcoin with the S&P 500 and Nasdaq indices reached a high peak from 0.2 to 0.6, representing an increase of more than 200%.
The IMF expressed that a growing correlation between bitcoin and traditional assets could lead investors to shift from one asset class to the other.
The document highlights that the bitcoin volatility might have caused one-sixth of the volatility of the S&P during the pandemic. It also caused volatility in one-tenth of the returns of the S&P 500,” the IMF states. In addition, a sharp drop in bitcoin could create greater fear of risk and lead to a fall in investment in the stock market.
The monetary entity firmly insists on the need for a global entity to regulate cryptocurrencies. It also points out that bitcoin and other cryptocurrencies are no longer on the edges of the financial system.
He adds that growing co-movements can represent risks for the financial system and that a coordinated and global regulatory effort is required to guide national efforts in this regard. Last December, three IMF representatives launched the convenience of a regulatory framework for cryptocurrencies worldwide.
By: Jenson Nuñez
