• IMF has published a blog highlighting increasing Co-relation between Crypto and Asian Equities
• Few regions of the world have embraced crypto assets as strongly as Asia
• While the financial sector appears to be relatively immune to sharp movements, this may not be the case in future boom-bust cycles.
• Return correlations between Bitcoin and Indian stock markets have increased tenfold during the pandemic

IMF has published a blog highlighting increasing Co-relation between Crypto and Asian Equities and the integration of Crypto’s with Financial Markets. Blog has been authored by Nada Choueiri, Anne-Marie Gulde-Wolf and Tara Iyer

According to the blog, few regions of the world have embraced crypto assets as strongly as Asia, where top adopters include individual and institutional investors ranging from India to Vietnam and Thailand. This raises the critical issue of the extent to which cryptocurrency has been integrated into the Asian financial system. While digitalization can help with the transition to an environmentally friendly payment system as well as financial inclusion, cryptocurrency can pose financial stability risks.

Prior to the pandemic, crypto appeared to be separate from the financial system. Bitcoin and other assets had little correlation with Asian equity markets, which helped to alleviate concerns about financial stability. In previous years the total market value of the world’s crypto assets increased to $3 trillion before hitting lows of $1 trillion. When central banks raised interest rates to combat inflation, Crypto market lost access to cheap borrowing.

While the financial sector appears to be relatively immune to sharp movements, this may not be the case in future boom-bust cycles. Individual or institutional investors who own both crypto and traditional financial assets or liabilities may become impacted. Large crypto losses may cause these investors to rebalance their portfolios, potentially causing financial market volatility or even default on traditional liabilities.

Return correlations between Bitcoin and Indian stock markets have increased tenfold during the pandemic, indicating that crypto offers limited risk diversification benefits. Volatility correlations have increased threefold, indicating possible risk sentiment spillovers between the crypto and equity markets.

The report emphasises the importance of addressing key data gaps that prevent national and international regulators from fully understanding cryptocurrency ownership and use, as well as its intersection with the traditional financial sector.

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