Correlation Between Performance of Equity Markets and Crypto Assets in Asia Increased: the IMF

The correlation between the performance of Asia's equity markets and crypto assets has increased as investors from that region piled into crypto in recent years, according to a blog from the International Monetary Fund (IMF).

The IMF said that the returns and volatility correlations between Bitcoin and Asian equity markets have increased significantly since 2020, before the pandemic.

Currently, in Asia, the return correlations of Bitcoin and Indian stock markets have increased by 10-fold over the pandemic. This signifies limited risk diversification benefits of crypto, according to the IMF.

Risk sentiment among the crypto and equity markets could see a possible rise as the volatility correlations have increased by 3-fold.

"Crypto trading, however, soared as millions stayed home and received government aid, while low-interest rates and easy financing conditions also played a role," the IMF said.

According to the IMF, the inclusion of the growing acceptance of crypto-related platforms and investment vehicles in the stock market and the over-the-counter market could be the possible factors that have led to an increased interconnectedness of crypto and equity markets in Asia.

The IMF stated that their research showed that the rise in crypto-equity correlations in Asia also led to a sharp increase in crypto-equity volatility spillovers in India, Vietnam and Thailand.

Following the spread of crypto globally, authorities in Asia have turned increasingly sensitive and alert to the growing risks posed by this phenomenon.

To do so, authorities have increased focus on crypto regulation, and the building regulatory framework is under construction, including in those countries mentioned above.

"A significant effort is also needed to address important data gaps that still prevent domestic and international regulators from fully understanding ownership and use of crypto and its intersection with the traditional financial sector," the IMF said.

The IMF backs the idea of clear guidelines on regulated financial institutions and seeks to inform and protect retail investors.

"Regulatory frameworks for crypto in Asia should be tailored to the main uses of such assets within the countries," the IMF said.

The IMF also added that crypto regulation should be closely coordinated across jurisdictions to be powerfully effective.

The total market value of the world's crypto assets in December was $3 trillion - a surge of 20-fold in just a year and a half. However, it then plunged to less than $1 trillion in June as central bank interest rate increases to contain inflation ended easy access to cheap borrowing.

The IMF has also warned nations to desist from adopting Bitcoin as their legal tender against central bank-issued money.

According to a May 9 report from Blockchain.News, the IMF has stated that crypto assets are an anti-establishment movement threatening the power of central banks and their monopoly control of the money supply. The global financial body warned of large risks associated with Bitcoin use on consumer protection, financial stability, and financial integrity.

Kristalina Georgieva, the IMF Managing Director, has said that it is not advisable for countries to embrace cryptocurrency as money in the economy.

However, Georgieva has identified the Central Bank Digital Currency (CBDC) as the best innovation for a country's financial system. "The future of money is a central topic at the IMF's Spring Meetings," the executive stated as she warned that using volatile crypto coins as money is not advisable.