Crypto prices moving in sync with stocks, posing systemic risks

Given their relatively high volatility and valuations, cryptocurrencies' increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption, according to IMF research.

It is thus time to adopt a comprehensive, coordinated global regulatory framework to guide national regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem.

Such a framework should encompass regulations tailored to the main uses of crypto assets and establish clear requirements on regulated financial institutions concerning their exposure to and engagement with these assets. Furthermore, to monitor and understand the rapid developments in the crypto ecosystem and the risks they create, data gaps created by the anonymity of such assets and limited global standards must be swiftly filled, IMF said.

The increased and sizeable 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.

Our analysis suggests that crypto assets are no longer on the fringe of the financial system, IMF said.

The market value of these novel assets rose to nearly $3 trillion in November from $620 billion in 2017, on soaring popularity among retail and institutional investors alike, despite high volatility. This week, the combined market capitalization had retreated to about $2 trillion, still representing an almost four-fold increase since 2017.

Amid greater adoption, the correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits and raises the risk of contagion across financial markets, according to new IMF research.