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The IMF asserts that Bitcoin, other digital assets have now become ‘an integral part of digital asset revolution,’ but also pose some risks.
New research by the International Monetary Fund (IMF) asserts that Bitcoin (BTC) and other crypto assets are now integral to mainstream finance. The global financial institution also pointed out that other facets of the financial space are now inextricably linked to the crypto movement. According to the institution, this growing correlation also includes stocks, and poses an increased risk to financial stability concerns.
In a recently published blog post, the IMF touched on the perceived sync in the movement of digital assets and financial markets. Referring to Bitcoin and other cryptos as ‘an integral part of digital asset revolution,’ part of the statement read:
“Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption.”
Digital currencies are well-known for their price volatility. According to the IMF, this “raises the risk of contagion across financial markets”. The global financial institution explained that there was hardly any interconnectedness between BTC and major stock indexes before the pandemic. However, digital assets have exploded in popularity in a short time – even though they first launched in 2009. A key reason for the surge in crypto adoption is the leverage the assets offer investors. Crypto assets can assist in diversifying investment risk by acting as a hedge against inflation and other asset class swings.
What the IMF Experts Are Saying About Bitcoin
According to IMF economist Tara Iyer, there is an increase of 12 to 16 percentage points in the price volatility of BTC to the S&P 500 and MSCI emerging markets indices. Iyer asserts this has been the case since the Covid pandemic began. She further stated that the increase in returns ranges between 8 to 10 percentage points.
IMF Monetary and Capital Markets Department director Tobias Adrian also weighed in on the BTC-stock market price correlation. Adrian’s assertion also buttressed the consensus expressed by analysts. According to the IMF financial counselor:
“The increased and sizeable co-movement and spillovers between crypto and equity markets indicate a growing interconnectedness between the two asset classes that permits the transmission of shocks that can destabilize financial markets.”
In order to mitigate the financial risks, the experts propose a plan. According to them, there should be a coordinated global blueprint to guide regulatory oversight and supervision. IMF’s chief economist Gita Gopinath made a similar call for a global policy last month. She also stated that banning crypto altogether as an option would do little to provide a remedial effect. As she put it:
“There are challenges to banning it whether you can end up with truly banning crypto because many exchanges are offshore and they are not subject to regulations of a particular country.”
The crypto market value rose to $3 trillion in November last year from $620 billion in 2017. However, due to the recent price slump to begin the new year, it now sits at $2 trillion.