Correlation between crypto and equity markets

The IMF said in recent days that the crypto market has begun to correlate with the stock market in India, Vietnam, and Thailand, and this may continue to spread to the global stock market.

The cryptocurrency market increasingly correlated with the stock market

The International Monetary Fund in a recent report pointed out that the correlation between cryptocurrency markets with Asian stock markets, especially the Indian, Vietnamese, and Thai stock markets, has significantly increased. In this regard, the IMF board indicated how this fact makes it even more urgent that we get our hands on precise regulation of cryptocurrency markets.

Anne-Marie Gulde-Wolf, Deputy Director of the IMF’s Asia-Pacific Department, Nada Choueiri, India Mission Chief, and Tara Iyer, an economist in the Global Financial Stability Analysis Division of the IMF’s Monetary and Financial Markets Department, authors of the research that demonstrated this direct correlation, commented on the findings: 

“While the returns and volatility correlations between bitcoin and Asian equity markets were low before the pandemic, these have increased significantly since 2020,” they wrote. “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 global financial institution noted that the correlation between Bitcoin and stock market returns, in India has increased tenfold since the beginning of the epidemic, indicating that cryptocurrencies offer modest risk diversification benefits. 

IMF officials went on to note how:

“The rise in crypto-equity correlations in Asia has been accompanied by a sharp increase in spillovers to cryptocurrency volatility in some Asian countries.” 

Increased potential propagation of systematic risk

This fact, according to International Monetary Fund experts, could indicate a growing interconnectedness between the two asset classes, a fact that in other words could pose a hypothetical danger of a financial shock transmitting from cryptocurrency markets to traditional ones. This is a danger that many regulators, including the SEC, would like to remedy by approving precise regulation of cryptocurrency markets in a timely manner.

IMF officials also stated that:

“Regulatory frameworks for crypto in Asia should be tailored to the main uses of such assets within the countries.”

The authors added: 

“They should establish clear guidelines on regulated financial institutions and seek to inform and protect retail investors.”

Jeff Kearns head of the IMF Study Center, which compiled the research, pointed out how this fact could soon impact traditional financial markets: 

“While the financial sector appears to have been insulated from these sharp movements, it may not be in future boom-bust cycles. Contagion could spread through individual or institutional investors that may hold both crypto and traditional financial assets or liabilities. Large losses on crypto may drive these investors to rebalance their portfolios, possibly causing financial-market volatility or even default on traditional liabilities.”