Bitcoin is integral to digital asset revolution, IMF says

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The International Monetary Fund (IMF) said cryptocurrencies have become a popular asset among institutional investors, but extreme price volatility has raised concerns about their financial stability.

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According to the latest report, the analysis suggests that the crypto and equity markets have become increasingly interconnected between economies over time.

IMF economist Tara Iyer said crypto assets such as Bitcoin have moved from an obscure asset class with few users to an integral part of the digital asset revolution, adding that with this transition comes financial stability issues.

She noted that bitcoin’s price volatility spillovers on the S&P 500 and MSCI emerging market indices have increased by around 12 to 16 percentage points since the start of the Covid-19 pandemic, while those of its yields increased by about eight to 10 percent. points.

“The fallout from the most traded stablecoin, Tether, to these indices has also increased by around four to six percentage points,” Iyer said.

In absolute terms, Bitcoin’s spillovers to global stock markets are significant, explaining about 14% to 18% of the variation in stock price volatility and eight to 10% of the variation in stock returns.

These findings, says 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 adviser Tobias Adrian recently claimed that since central banks cut interest rates to near zero to support economies during the pandemic, there has been an increase in concomitant movements and spillovers between the crypto and equity markets.

The increased and significant co-movement and fallout between crypto and equity markets indicates a growing interconnection between the two asset classes that allows the transmission of shocks that can destabilize financial markets, Adrian said.

Disclaimer: The views and opinions expressed by the author should not be taken as financial advice. We do not give advice on financial products.

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