IMF warns: Convergence between Bitcoin and U.S. stocks threatens financial stability

Bitcoin and U.S. large-cap stocks have moved more in sync since the coronavirus crisis, the International Monetary Fund said on Tuesday, and that closer correlation means financial stability is at risk.

“Our analysis shows that cryptoassets are no longer on the fringes of the financial system,” the IMF said in a blog post, noting that the correlation between bitcoin and the S&P 500 has surpassed that of stocks and gold, major Correlations between currencies and other long-term asset classes such as investment-grade bonds.

This stronger correlation suggests that the world’s most valuable cryptocurrency has been acting as a risk asset, the article said.

During the period from 2017 to 2019, before the outbreak of the new crown pneumonia, the correlation coefficient between Bitcoin and the daily volatility of US stocks was only 0.01. However, the IMF said, “The indicator jumped to 0.36 in 2020-21, with these assets moving more in tandem, rising as they rose and falling as they fell.”

As of Tuesday, Bitcoin’s market cap was $812 billion. The IMF said the digital currency’s volatility could explain about one-sixth of the S&P 500’s volatility during the pandemic and about one-tenth of the variability in the S&P 500’s returns.

“As a result, a sharp drop in bitcoin’s price would increase investor risk aversion and lead to a decline in stock market investment. The reverse spillovers—that is, from the S&P 500 to bitcoin—are of similar magnitude on average, suggesting a The sentiment of a market is transmitted to another market in an extraordinary way.”

Before the pandemic, Bitcoin, Ethereum and other cryptoassets had little correlation with major stock indexes. But after the outbreak, global central banks unleashed unprecedented financial support to cushion the impact of the crisis, investors’ risk appetite rose, and both cryptocurrencies and U.S. stocks surged.

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