Cryptocurrencies Can No Longer Cover Your Investments – POLICY

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“The correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits and raises the risk of contagion across financial markets,” wrote Tobias Adrian and Mahvash Qureshi, two high-ranking officials from the Fund’s capital markets departments. Tara Iyer, an economist who specializes in global financial stability, also contributed to the research.

The IMF unveiled its research in a blog Tuesday, reiterating last month’s calls for global regulatory action. Without action, massive swings in both asset classes could exaggerate financial instability, it warned.

Highlights

  • Cryptocurrency might have served that purpose before the pandemic hit. But Bitcoin has “moved more in lockstep” with stocks indices, such as the S&P 500, since central banks launched massive asset-buying programs to cushion their economies against the pandemic, the IMF noted.

  • The research is a blow to crypto proponents, who have described the likes of Bitcoin as an alternative to gold to hedge against market volatility.

This growing connection between both assets gives even more reason to develop a global framework for regulating and supervising crypto assets to prevent financial instability.

The trend is “also apparent in emerging market economies,” where the take up of cryptocurrencies has much stronger, the bloggers wrote.

“Clear requirements” are especially needed for financial companies that hold crypto assets, the staffers said.

The Basel Committee for Banking Supervision has already proposed slapping banks with tough capital buffers for cryptocurrencies — standards the European Commission has said it will consider implementing.

The anonymous nature of crypto assets also needs to be tackled, IMF staffers said.