The IMF says Bitcoin’s high correlation with stocks means it’s more of a risk asset.
Financial institution advocates for more global regulation of the ecosystem in order to reduce risk to the rest of market.
Bitcoin has outperformed S&P 500 in 2017 and there is little correlation to stock indexes until 2019, when Covid-19 was declared.
Since then, Bitcoin and other cryptocurrency have generally moved in sync to the major stocks of Wall Street.
After plummeting in March 2020 crypto and equities surged as investors returned risky assets. A scenario that the International Monetary Fund, (IMF), now believes could pose contagion threats to the wider financial markets.
“The correlation coefficient of their daily moves was just 0.01[before 2020], but that measure jumped to 0.36 for 2020–21 as the assets moved more in lockstep, rising together or falling together,” the Washington DC-based financial institution said.
Chart showing the correlation between Bitcoins and S&P 500 Source: IMF blog
While the IMF report published on 11 January states that cryptocurrencies “are no longer on the fringe of the financial system,” it takes a negative view of the correlation with stocks.
The report claims that Bitcoin’s increased adoption and the rising correlation it’s showing with stocks limits the supposed “risk diversification benefits” that see many investors opting for it over traditional safe have assets such as gold.
The correlation between Bitcoins and the S&P 500 has been shown to be much greater than what is seen between stocks, gold, and major global currencies.
According to the IMF, the lockstep trading that is seen in the stock market with Bitcoin suggests that Bitcoin may be more risky than a hedge.
According to the IMF, this puts the markets at risk- specifically saying it threatens “contagion across financial markets.”
According to the institution’s assessment, any sharp declines in the Bitcoin market could lead to investors being cautious. It also suggests that investors might be tempted to invest in stocks as a result.
“Spillovers in the reverse direction—that is, from the S&P 500 to Bitcoin—are on average of a similar magnitude, suggesting that sentiment in one market is transmitted to the other in a nontrivial way,” the report added.
IMF recommends the adoption of a global regulatory structure to monitor and possibly reduce financial system risks.
In December, CNBC’s “Fast Money” trader Brian Kelly said Bitcoin and Nasdaq were trading in lockstep. He pointed out that the 30-day correlation had been at 47%, with Bitcoin being an indicator of stocks indexes.