Why Bitcoin and Ethereum Saw a Peak in Correlation with Asian Stocks
The International Monetary Fund (IMF) published a study on the increase in positive correlation with Bitcoin (BTC), Ethereum (ETH) and Asian stocks. The financial organization claims that digital assets began an accelerated integration with the region during the pandemic as more people traded them to generate returns.
From 2020 to its all-time high in 2021, the total crypto market capitalization increased over 20-fold, causing Bitcoin and Ethereum to discover price. As seen in the chart below, total cryptocurrency trading volume rose very close to $900 billion from under $100 billion at its peak in 2021.
The regions with the highest trade volume are America and Europe. Middle East and Central Asia, EM Asia and AE Asia are under other regions. However, the IMF claims that the use of cryptocurrencies in Asia may pose a systematic risk to the financial world.
If the price of Bitcoin and the crypto market regains its previous levels, and re-enters price discovery, the financial institution believes that there could be negative consequences. If digital assets were to rise and crash as they did in the past year, “contagion could spread through individual or institutional investors”.
As cryptocurrencies decline, these investors will reportedly “rebalance their portfolios, possibly causing volatility in financial markets or even defaulting on traditional obligations”, the IMF said. In that sense, the financial institution shared the chart below to show the contrast between the price of Bitcoin and Asian stock indices.
From 2020 to 2022, this correlation appears to increase with Thailand and Vietnam showing the highest positive correlation. This has led to similar price actions for Bitcoin and traditional stocks in these countries.
In India, the correlation between the price of Bitcoin and local stocks has increased by 10 times with a 3-fold increase in volatility correlations. The financial institution believes that if the price of Bitcoin decreases or increases, there may be “fluctuations in risk sentiment”.
Could Bitcoin Lead Asian Markets Into A Shock?
The financial institution suggests that these “spillovers” are already happening in Asia. Therefore, the authorities in the region have worked to implement a set of regulations to supposedly reduce risk.
The financial institution failed to mention that Bitcoin has shown a positive correlation with the performance of major stock indices worldwide, a phenomenon not limited to Asia. As shown below, the price of BTC has moved in line with the Nasdaq 100 since the start of 2022.
The positive correlation has been attributed to current macroeconomic conditions. These indices often move in step with macroeconomic events, such as the one the market has experienced since 2020.
Therefore, the positive correlation between Bitcoin and Asia stocks can also be attributed to the cryptocurrency reaching high levels of adoption rather than a telltale sign of potential financial risk.
