According to the International Monetary Fund, the high volatility and valuation of cryptocurrencies, as well as their increasing co-movement with equity markets, will soon pose risks to financial stability in countries with widespread crypto adoption.
On Tuesday, the IMF announced this in a blog post titled, “Crypto Prices Move More in Line With Stocks, Posing New Risks”.
Nigeria ranks sixth in the world in terms of cryptocurrency adoption, according to Chainalysis’ 2021 Global Crypto Adoption Index. The top three countries are Vietnam, India, and Pakistan.
In a recent post, the IMF stated that crypto assets were no longer on the periphery of the financial system and that there was an increasing and significant co-movement between crypto and equity markets, which could cause shock and destabilize financial markets.
It revealed that the stronger correlation between crypto and equities was visible in emerging market economies, the majority of which are at the forefront of crypto-asset adoption.
The fund said, “The increased and sizable co-movement and spillovers between crypto and equity markets indicate a growing interconnectedness between the two asset classes that permits the transmission of shocks that can destabilise financial markets.
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Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption”.
Crypto assets, such as bitcoin, have matured to become an integral part of the digital asset revolution, raising financial stability concerns, according to the IMF.
“Before the pandemic, crypto-assets such as bitcoin and ether showed little correlation with major stock indices,” the Washington-based lender stated. They were thought to aid in risk diversification and act as a hedge against swings in other asset classes.; but this changed after the extraordinary central bank crisis responses of early 2020. Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.
It said, “Increased crypto-stocks correlation raises the possibility of spillovers of investor sentiment between those asset classes. Indeed, our analysis, which examines the spillovers of prices and volatility between crypto and global equity markets, suggests that spillovers from Bitcoin returns and volatility to stock markets, and vice versa, have risen significantly in 2020–21 compared with 2017–19″.