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Crypto fuels stock market volatility: IMF

Crypto fuels stock market volatility: IMF
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“Given its relatively high volatility and valuations, its increased joint mobility could soon pose risks to financial stability especially in countries that adopt crypto on a large scale.”

The sharp sell-off in crypto assets since November has caused the value of digital assets to drop from about $3 trillion to about $2 trillion, although their value is still nearly four times higher than in 2017.

Global stock markets have also suffered declines in recent weeks, due to the specter of central banks raising interest rates faster than expected and due to the spread of the Covid-19 virus, Omicron.

In a zero interest rate environment, investors have piled into riskier assets such as cryptocurrencies, stocks and bonds junk to chase returns.

It is estimated that more than two million Australians deal with private digital currencies, and institutional investors, including some pension funds, are including cryptocurrencies as a small part of their overall portfolio.

The Commonwealth Bank of Australia will allow its customers to hold and use bitcoin and other cryptocurrencies through its banking app with 6.5 million users in a bid to attract young customers and keep up with competitors such as Square and PayPal, already allowing users to trade and spend bitcoin.

The IMF analysis found that the spillover between the crypto and stock markets tends to increase during bouts of financial market volatility — as occurred in the market turmoil in March 2020 — or during sharp fluctuations in bitcoin prices, as occurred in early 2021.

Bitcoin yields have not moved in a particular direction with the US stock index, S&P 500, between 2017 and 2019.

The 60-day correlation coefficient for their daily moves was only 0.01, but that metric jumped to 0.36 between 2020 and 2021, as the asset price moved at a steady pace, and together rose or fell closely together.

The IMF said bitcoin’s correlation with stocks was higher than the correlation between stocks and other assets such as gold, investment grade bonds and major currencies, “indicating the benefits of diversifying limited risk in contrast to what was initially perceived.”

According to International Monetary Fund estimates, bitcoin’s volatility accounts for about one-sixth of S.&P 500 variability during a pandemic, and about one-tenth of the variance in S.&Returns P500.

As such, a sharp drop in the price of Bitcoin can increase investors’ risk aversion and lead to lower investment in the stock markets.

Fallout in the reverse direction – i.e. from S.&P 500 to bitcoin – on average of the same size, which indicates that sentiment in one market is transmitted to the other in a non-intuitive way. “

Central banks are exploring the introduction of wholesale and retail digital currencies, which would rival private digital currencies such as Bitcoin, Ethereum, Binance and ether.

The head of the Banking Supervisory Authority, Wayne Byers, raised concerns in an interview published this week that the emergence of a central bank digital currency could destabilize the financial system by encouraging some customers to hold digital cash directly with the Reserve Bank rather than putting money in it. commercial bank deposits.

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