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- Research by the IMF (International Monetary Fund) has revealed that the correlation of Bitcoin and other cryptocurrencies with stock market swings has increased, therefore, they are not an investment hedge anymore.
- The correlation jumped to 0.36 in 2020-2021 from being 0.01 from 2017-2019, and the response of central banks to the coronavirus’s economic impact has been a significant boost for this increased correlation.
- The research also highlighted a significant threat towards financial stability due to this correlation and pointed to the need for regulations to govern the crypto industry.
As per the IMF (International Monetary Fund), the value of cryptocurrencies, including Bitcoin, has been advancing in correlation with the stock market’s ups and downs, which, therefore, excludes the status of cryptocurrencies as the investment hedge. The thought has been present in a blog post, where the IMF highlighted that with this new correlation, the cryptocurrency market’s volatility might even fall over equities, thus endangering the financial stability in exchange.
The International Monetary Fund (IMF) is an organization made up of 190 countries that works to encourage global monetary cooperation, promote high employment with sustainable economic growth, secure financial stability, facilitate international trade, and reduce poverty around the globe.
Increasing Correlation – IMF research
The research conducted by IMF revealed that the S&P 500 index’s 60-day correlation coefficient and daily movements of Bitcoin was about 0.01 from 2017 to 2019, but from 2020 to 2021, this measuring factor has surged to 0.36. The organization also indicated that the correlation has now covered the equity market and stablecoins simultaneously.
The IMF further explained that this correlation was boosted by the response of central banks for the economic impact of coronavirus or COVID-19. The organization said that digital assets like Bitcoin and other cryptocurrencies were considered as an alternative for other investment options to market swings, and now they do not fulfill the motive anymore. The IMF stated that the correlation of cryptocurrencies with traditional holdings has escalated over time, which resulted in limiting their advantages of diversifying risks and increasing the contamination risk over the financial markets.
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The Need Of Regulating Crypto Industry
As per the research, the correlation factor has proved that Bitcoin has been the risky digital asset all the time, and the correlation Bitcoin has with the stock market has crossed the correlation that stocks share with other assets, including gold. As the report pointed to a significant threat towards financial stability, the organization highlighted the need for regulations to govern the cryptocurrency industry. However, the organization does not want laws for strict regulation but to manage how the crypto industry would relate to other regulated financial institutions.
The research could be viewed by many as a problem for the supporters of the crypto industry, who earlier marked Bitcoin as a hedge against the volatility of the market and an alternative to gold. Recently, the IMF identified that cryptocurrencies are now growing to be an essential part of the financial industry, and it published a framework to create a standard regulatory framework for the crypto industry. Also, Gita Gopinath, the chief economist of the IMF, said that the governmental authorities worldwide must not ban cryptocurrencies but should call for the industry’s regulation.