Bitcoin: IMF sees risk in higher correlation with stocks

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Many advocates of bitcoin and other cryptocurrencies have said they can act as a hedge against declines in other financial assets, such as stocks, reducing risk for investors.

The International Monetary Fund questions this assessment.

Amid the expansion of digital currencies, their “correlation with traditional holdings like stocks has increased dramatically, limiting their perceived risk diversification benefits and increasing the risk of contagion in financial markets,” wrote International Monetary Fund officials on the group’s blog, citing a new IMF. to research.

The IMF, which has 190 member countries, is responsible for maintaining monetary cooperation, facilitating international trade, etc.

Before the Covid pandemic, digital currencies showed little correlation with stocks. But thereafter, “crypto prices and US stocks both surged amid an easy global financial backdrop and increased investor risk appetite,” the blog said.

In 2017-19, bitcoin and the S&P 500 index only had a correlation of 0.01, according to IMF research.

But that fell to 0.36 for 2020-21. The correlation scale ranges from zero (no correlation) to 1 (full correlation).

So far this year, the S&P 500 has slipped 1.7%, while bitcoin has fallen 10.4%. It recently traded at $ 42,512, down 3%.

“Stronger correlations suggest that bitcoin has acted like a risky asset,” the IMF blog said.

“Its correlation with equities has become higher than between equities and other assets such as gold, investment grade bonds and major currencies, indicating limited benefits in risk diversification as opposed to what was initially perceived. ”

The implications are worrying, IMF officials said. “The increased correlation between crypto stocks increases the possibility of investor sentiment spillovers between these asset classes. … A sharp drop in bitcoin prices can increase investor risk aversion and lead to lower investment in the stock markets.

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