Recent reports by the International Monetary Fund indicate that the crypto market is beginning to correlate with the stock market in India, Vietnam, and Thailand, and this could spread to the global market.
The cryptocurrency market increasingly correlated with the stock market
IMF recently reported that cryptocurrency markets are significantly correlated with Asian stock markets, especially the Indian, Vietnamese, and Thai stocks. We need precise regulation of cryptocurrency markets now, according to the IMF board.
In the research that demonstrated the direct correlation between the two indicators, Anne-Marie Gulde-Wolf, Deputy Director of the IMF’s Asia-Pacific Department, Nada Choueiri, the Chief of the Indian Mission, and Tara Iyer, an economist at the IMF Monetary and Financial Markets Department’s Global Financial Stability Analysis Division, commented on the findings:
Compared to when the pandemic started, bitcoin and Asian equity markets had very low returns and volatility correlations. In addition to low interest rates and easy financing conditions, cryptocurrency trading soared as millions remained home and received government assistance.
As an indication of the benefits cryptocurrencies may offer for risk diversification, the global financial institution noted that Bitcoin and stock market returns have been correlated tenfold in India since the outbreak began.
According to IMF officials, the situation is as follows:
Several Asian countries have seen a sharp rise in cryptocurrency volatility because of the rise in crypto-equity correlations.”
Increased potential propagation of systematic risk
In other words, a possible danger of a financial shock transferring from cryptocurrency markets to traditional ones could arise from this fact, according to experts at the International Monetary Fund. In a timely manner, regulators, including the SEC, are looking for ways to mitigate this danger.
Officials from the IMF also said:
“Asian countries should adopt regulatory frameworks tailored to the main uses of crypto assets.”
According to the authors:
“A clear set of guidelines should be put in place for regulated financial institutions, and retail investors should be informed and protected.”
IMF Study Center head Jeff Kearns highlighted how traditional financial markets might be soon impacted by this fact:
“There is no guarantee that the financial sector will remain immune to boom-bust cycles in the future. Investors who hold both traditional and crypto assets or liabilities could become exposed to the crypto contagion. It is possible that large crypto losses could force investors to rebalance their portfolios, creating volatility in financial markets or even causing defaults on traditional liabilities.”
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