Since the Covid-19 pandemic’s onset in March 2020, cryptocurrencies such as bitcoin (BTC-USD) and ethereum (ETH-USD) have been increasingly integrated into Asia’s financial system, highlighting the need for additional regulation, the International Monetary Fund said in a recent blog post.
Returns and volatility correlations between cryptos and Asian stocks were low before the pandemic but they increased significantly since 2020, sparked by easy access to cheap borrowing via low interest rates alongside government stimulus payments. The return correlations of bitcoin (BTC-USD) and Indian stock markets, for example, have surged by 10-fold over the pandemic, “suggesting limited risk diversification benefits of crypto,” the IMF wrote.
For some context, bitcoin (BTC-USD), the largest digital token by market cap, experienced a wild rally from the start of the pandemic to its November 2021 peak. During that time, its price jumped by over 1,000% to an all-time high of $68.9K. But as central banks like the Federal Reserve and European Central Bank tighten monetary policy to bring down inflationary pressures, bitcoin lost a big chunk of those gains, now up 302% to $20.64K as of Friday afternoon. Despite being elevated from prepandemic levels, the magnitude of BTC’s lingering slump suggests that traders’ risk appetite is narrowing as fiscal aid wanes.
All in all, the increased relationship between cryptos and Asian equities pose certain risks to financial stability, the IMF warned.
“While the financial sector appears to have been insulated from these sharp movements, it may not be in future boom-bust cycles,” the agency, which is open to the notion that digitalization can foster financial inclusion, said. “Contagion could spread through individual or institutional investors that may hold both crypto and traditional financial assets or liabilities.”
The IMF said one cause to the increasing interconnectedness of crypto and Asian equity markets could be the potentially growing acceptance of crypto-focused platforms and investment vehicles in the stock market. Another reason could be broad growth in crypto adoption by retail and institutional investors in Asia, it said.
There was also a sharp rise in crypto-equity volatility spillovers in India, Vietnam and Thailand, signaling “a growing interconnectedness between the two asset classes that permits the transmission of shocks that can impact financial markets,” as per the IMF’s spillover methodology developed in its January Global Financial Stability Note.
In turn, Asian authorities have increased their focus on crypto-related regulation, as regulatory frameworks are already in the works in several countries, including India, Vietnam and Thailand, the IMF said. Towards the end of March, Thailand blocked the use of digital tokens as a means of payment, citing risks evolving around the emerging space including price volatility, cyber theft and money laundering.
India, meanwhile, has been quite vocal about clamping down on the crypto industry in the past year to safeguard consumers. In fact, crypto trading volumes in the country were falling after its digital-asset tax laws took effect in April.
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