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The IMF says Bitcoin’s high correlation with stocks indicates it behaves more like a risky asset.
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The financial institution calls for increased global regulation of the ecosystem to reduce potential spillover risks to the broader market.
Bitcoin outperformed the S&P 500 since 2017 and showed little or no correlation with stock indices until 2019, when the Covid-19 pandemic struck.
Since then, Bitcoin and other cryptocurrencies have largely moved in step with major Wall Street equities.
After plunging in March 2020, crypto and stocks began to recover as investors returned to higher-risk assets — a dynamic the International Monetary Fund (IMF) now warns could pose spillover risks to broader financial markets.
“The correlation coefficient of their daily moves was only 0.01 [before 2020], but that measure jumped to 0.36 for 2020–21 when the assets moved more in lockstep, rising together or falling together,” the Washington, D.C.-based institution said.
Chart showing correlation between Bitcoin and the S&P 500. Source: IMF blog
Published on January 11, the IMF report states that cryptocurrencies are “no longer on the fringes of the financial system,” and it expresses concern about the growing correlation with equities.
The report argues that Bitcoin’s wider adoption and its rising correlation with stocks reduce the potential “risk-diversification benefits” that many investors seek when choosing it over traditional assets such as gold.
The correlation between Bitcoin and the S&P 500 has proven to be significantly higher than correlations observed between equities and gold or major global currencies.
The IMF says the synchronized trading seen with the stock market suggests Bitcoin behaves more like a risky asset than a hedge.
According to the IMF, this dynamic exposes markets to a particular threat — namely, the risk that losses could “spread across financial markets.”
In its assessment, the institution warns that sharp declines in the Bitcoin market can trigger risk aversion among investors. That, in turn, may cause them to pull back from equities.
“Spillovers in the opposite direction — that is, from the S&P 500 to Bitcoin — are on average of a similar magnitude, suggesting that sentiment on one market is transmitted to the other in a non-trivial way,” the report added.
Pointing to systemic concerns, the IMF recommends adopting a global regulatory framework focused on supervision, which could help mitigate risks to the financial system.
In December, CNBC “Fast Money” trader Brian Kelly said Bitcoin and the Nasdaq were trading in lockstep. He noted a 30-day correlation of around 47% at the time, with Bitcoin often acting as a leading indicator for stock indices.