Crypto’s growing correlation with Asian stocks poses financial stability risk: IMF

Since the Covid-19 pandemic began in March 2020, cryptocurrencies such as bitcoin (BTC-USD) and ethereum (ETH-USD) have become increasingly integrated into Asia’s financial system, underscoring the need for further regulation, the International Monetary Fund said in a recent blog mail.

Returns and volatility correlations between crypto and Asian stocks were low before the pandemic, but they increased significantly since 2020, triggered by easy access to cheap loans via low interest rates along with government stimulus payments. The return correlations of bitcoin (BTC-USD) and Indian stock markets, for example, have increased by 10 times over the pandemic, “suggesting limited risk-spreading benefits of crypto,” the IMF wrote.

For some context, bitcoin (BTC-USD), the largest digital token by market cap, experienced a wild rally from the start of the pandemic to its peak in November 2021. During that time, its price jumped over 1,000% to an all-time high of $68 ,9K. But as central banks like the Federal Reserve and the European Central Bank tighten monetary policy to reduce inflationary pressures, bitcoin lost a large chunk of those gains, now up 302% to $20.64K as of Friday afternoon. Despite being lifted from pre-pandemic levels, the scale of BTC’s prolonged decline suggests traders’ risk appetite is waning as fiscal aid wanes.

All in all, the heightened relationship between crypto and Asian stocks poses certain risks to financial stability, the IMF warned.

“While the financial sector appears to have been insulated from these sharp movements, it may not be in future boom-bust cycles,” said the agency, which is open to the notion that digitization could promote financial inclusion. “Contagion can spread through individual or institutional investors who may hold both crypto and traditional financial assets or liabilities.”

The IMF said one reason for the growing interconnection of crypto and Asian stock markets could be the potentially growing acceptance of crypto-focused platforms and investment vehicles in the stock market. Another reason could be broad growth in crypto adoption by private and institutional investors in Asia, it said.

There was also a sharp increase in volatility effects of crypto stocks in India, Vietnam and Thailand, signaling “a growing interconnection between the two asset classes that allows the transmission of shocks that could affect financial markets,” according to the IMF’s spillover methodology developed in January Global Financial Stability Note.

For their part, Asian authorities have increased their focus on crypto-related regulation, as regulatory frameworks are already in the works in several countries, including India, Vietnam and Thailand, the IMF said. Towards the end of March, Thailand blocked the use of digital tokens as a means of payment, citing risks developing around the new area, including price volatility, cyber theft and money laundering.

India, meanwhile, has been quite vocal about cracking down on the crypto industry over the past year to protect consumers. In fact, crypto trading volumes in the country fell after the digital asset tax laws took effect in April.

Earlier (August 22), crypto liquidity starts recovery as stablecoin market cap stops falling.