What will happen when crypto assets are no longer on the fringes of the financial system?

The connection between virtual assets and financial markets is getting closer and closer, and as the crypto market continues to develop in 2020, multiple institutions have pointed out that cryptocurrencies will no longer be marginal. Crypto assets are no longer on the fringes of the financial system, the International Monetary Fund (IMF) further stated in its latest report. But it also expressed concerns about the risks of the crypto market. The IMF noted that with the widespread adoption of cryptoassets, the correlation between cryptoassets and traditional holdings such as stocks has increased significantly, which could soon pose risks to financial stability, especially in countries with widespread cryptocurrency adoption.

Crypto assets are no longer marginal

The total market value of encrypted assets has increased from $620 billion in 2017 to the current $2.1 trillion. At the peak, it once exceeded $3 trillion. The current market value is still nearly four times higher than in 2017. At the same time, its popularity has soared among retail and institutional investors, and it has gained widespread social discussion.

In terms of asset correlations, cryptoassets such as Bitcoin and Ethereum had little correlation with major stock indices prior to the pandemic. They are believed to help spread risk and serve as a hedge against volatility in other asset classes. But that changed following the central bank’s crisis response in early 2020. Both cryptocurrency prices and U.S. stocks surged amid easing global financial conditions and increased investor risk appetite.

For example, in 2017-2019, Bitcoin’s returns did not move in a particular direction with the U.S. benchmark stock index S&P 500, their daily change correlation coefficient was only 0.01, but as assets rose or fell in tandem, The indicator jumped to 0.36 in 2020-2021. Therefore, in the past 2021, institutions including Goldman Sachs, TD Securities, etc. have pointed out that Bitcoin is not a “safe-haven asset”.

Furthermore, given the popularity of crypto investing, it has risen or fallen in tandem with stock assets. Several institutions have said that Bitcoin is no longer on the fringes. In December 2020, cryptocurrency rating agency Weiss Crypto Ratings tweeted that cryptocurrencies will no longer be fringe currencies. They will be finance for ordinary people. Like the passage of time, it is inevitable and unstoppable. In the same month, Finch Capital released a forecast report on European Fintech in 2022, stating that Crypto/DeFi has become mainstream, and the adoption of Crypto and DeFi by enterprises has paved the way for the global popularity of encryption. On Jan. 1, CNET’s crypto predictions for 2022 noted that crypto will go further into the mainstream.

In addition, Forbes released a prediction for the crypto market and blockchain in 2022, saying that stablecoins will become mainstream. According to the Presidential Working Group report, stablecoin utilization increased by 500% between October 2020 and October 2021, and this rate of adoption does not appear to be trending down. Bitcoin will hit $100,000, rising inflation, continued monetary easing around the world, and the proliferation of cryptoassets all point to the conclusion that cryptoassets are here to stay.

raise risk concerns

In its latest report, the IMF further stated that the stronger correlation indicates that Bitcoin has been a risky asset. Its correlation with equities has been higher than between stocks and other assets such as gold, investment-grade bonds and major currencies, suggesting that risk diversification benefits are limited compared to initial expectations.

The increased and sizeable co-movements and spillovers between cryptocurrency markets and equity markets indicate the growing interconnectedness between these two asset classes, which enables the transmission of shocks that could destabilize financial markets. According to the IMF analysis, crypto assets are no longer on the fringes of the financial system. Given their relatively high volatility and valuations, their increased linkage could soon pose a risk to financial stability, especially in countries with widespread cryptocurrency adoption. Therefore, it is time to adopt a comprehensive, coordinated global regulatory framework to guide national regulation and mitigate financial stability risks from the crypto ecosystem.

According to the IMF, such a framework should include regulations tailored to the primary uses of cryptoassets, with clear requirements for regulated financial institutions regarding their exposure to and participation in these assets. Furthermore, in order to monitor and understand the rapid growth of the crypto ecosystem and the risks it poses, data gaps created by the anonymity and limited global standards of such assets must be filled quickly.

In addition, a recent report released by the Ouke Cloud Chain Master also pointed out that Bitcoin is not a safe-haven asset, but has the attributes of a risky asset. Given the size of Bitcoin’s market capitalization, it is difficult for it to truly get out of the independent market, and it will definitely be affected by the market’s expectations for the economic environment and the overall sentiment.

Overall, the crypto economy is going mainstream, however, the industry is far from perfect. Investment bank and asset manager JMP Securities said the industry is still in its formative stages, regulation has yet to develop, and given the technological side of the space, the industry needs more education, making adoption and usage not always intuitive. Many of the currently perceived negatives for the space will continue to improve with further maturity and time.

The future of encryption

In general, crypto investment is increasingly favored by the market. Bitcoin has become a major category of investment, with most investors considering the crypto asset as part of a diversified portfolio. Furthermore, over the past dozen years, the adoption of cryptocurrencies has greatly expanded, and BTC is now embraced by commercial giants working in the retail market. Including Starbucks, AT&T and PayPal, these companies have adopted bitcoin and other cryptocurrencies for their customers. However, the overall market still needs to be further strengthened and matured in regulation. For the further development of encrypted assets, many parties have given different answers.

Fidelity, one of the largest traditional money managers, launched Fidelity Digital Assets in 2018 to provide institutional investors with cryptocurrency products and services, including bitcoin. More recently, Tom Jessop, president of Fidelity Investments’ crypto-asset arm, Fidelity Digital Assets, said that cryptocurrencies are a unique asset class, noting that the firm and others are engaging well with regulators to bring this asset class together. into the mainstream.

Chris Kuiper, head of research at Fidelity Digital Assets, and research analyst Jack Neureuter said in a report that 2022 will definitely require new regulation as crypto-native companies continue to innovate and grow the industry. Regulation and product access go hand in hand, they said, hoping that 2022 will bring more clarity than previous years, as it is key to bringing a larger portion of the hundreds of trillions of traditional assets into the digital asset ecosystem. The combination of proper regulation and financial firms committed to providing investors with access to digital assets could boost overall adoption, Fidelity analysts said.

Cardano founder Charles Hoskinson predicted in a live YouTube broadcast that in 2022 and beyond, the cryptocurrency industry could be subject to heavy regulatory involvement and risk of outlawing.

Globally, 2022 will see greater clarity on the regulation of cryptocurrencies, according to Sam Bankman-Fried, CEO of FTX. He said the government’s stance would help boost cryptocurrency trading, greatly facilitating the entry of big investors. He also said that 2022 will mark the beginning of a major breakthrough in stablecoin regulation, with the SEC and CFTC likely to become more involved.

Gita Gopinath, chief economist at the International Monetary Fund (IMF), said that cryptocurrencies appear to be more attractive to emerging markets compared to advanced economies, which have exchange rate controls, capital flow controls, and cryptocurrencies will have this effect. Influence. Therefore, regulation is absolutely important for this industry. Given the decentralized nature of cryptocurrencies, banning cryptocurrencies would present practical challenges that would require a global cryptocurrency policy.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-will-happen-when-crypto-assets-are-no-longer-on-the-fringes-of-the-financial-system/
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