Bitcoin and Asian stock market return correlation increased 10x over pandemic: IMF

Before the world was hit by COVID-19, crypto-assets like Bitcoin and Ether showed little correlation with financial markets. After the pandemic, the lines have become increasingly blurred.

In a new blog post, IMF economists said more Asian countries have adopted digital assets in the past couple of years, while highlighting the need for regulation.

The organization noted that digitization can lead to a much-needed shift to an environmentally conscious payment system and also contribute to financial inclusion. However, the potential risks to financial stability associated with the integration of crypto into the financial system in Asia can be ignored.

Asia in focus

Investors in the region have piled up a huge amount of crypto, closely following the global trend. As a result, the IMF said the correlation between the performance of Asia’s stock markets and cryptoassets increased significantly since the start of the pandemic, as well as returns and volatility.

In the Indian context, the group of economists observed that the return correlations of Bitcoin and the country’s stock markets have risen by as much as 10 times in relation to the pandemic. This was indicative of the “limited risk spread” benefits of crypto. In addition, volatility correlations have increased by 3x – meaning potential “risk sentiment spillovers among the crypto and equity markets.”

The interconnection of the crypto and stock markets in Asia has reached a new high. Some of the factors in this trend are the growing acceptance of crypto-focused companies and investment vehicles in the equity and over-the-counter (OTC) market and increasing retail and institutional crypto adoption, many of these players have delved into both equity and crypto.

Interestingly, the IMF also found that the rise in crypto-equity correlations on the continent has been accompanied by an increase in crypto-equity volatility effects in countries such as India, Vietnam and Thailand.

“This indicates a growing correlation between the two asset classes that allows for the transmission of shocks that can affect financial markets.”

Need for regulation

Despite calls for regulatory clarity in response to the growing crypto activity in Asia, many countries have opted for either strict measures or pushed to implement blanket bans. The regulatory framework, although underway, has been very slow in Asia, including India, Vietnam and Thailand.

IMF economists believe that such regulatory frameworks should be designed for the main use of such assets in the countries. They went on to add,

“They should establish clear guidelines for regulated financial institutions and seek to inform and protect retail investors. Finally, to be fully effective, crypto regulation should be closely coordinated across jurisdictions.”