- The IMF says Bitcoin’s high correlation with stocks makes it a riskier asset.
- The financial institution calls for more global regulation of the ecosystem to reduce potential risks to the wider market.
Since 2017, Bitcoin has outperformed the S&P 500, and until 2019 it showed little connection with equity indices. That changed with the onset of the Covid-19 pandemic.
From that point on, Bitcoin and other cryptocurrencies have largely moved in step with major Wall Street stocks.
After the sharp sell-off in March 2020, cryptocurrencies and equities began to recover together as investors returned to risk assets. According to the International Monetary Fund (IMF), that synchronized behavior can create risks that may spread to broader financial markets.
“The correlation coefficient of their daily movements was only 0.01 [before 2020], but in 2020–2021 this measure jumped to 0.36, as the assets began to move more smoothly and rise or fall together,” the IMF said (Washington, D.C.).
Chart showing the correlation between Bitcoin and the S&P 500. Source: IMF blog
Although the IMF report, published on January 11, notes that cryptocurrencies are “no longer on the periphery of the financial system,” the institution expresses concern about Bitcoin’s growing correlation with stocks.
The report argues that Bitcoin’s rise in popularity, together with its increasing correlation with equities, reduces the potential benefits of risk diversification, since many investors choose it over traditional safe-haven assets like gold.
The correlation between Bitcoin and the S&P 500 is substantially higher than the correlation between equities and gold or major global fiat currencies.
The IMF contends that the near-synchronous trading of these assets on the stock market indicates that Bitcoin behaves more like a risky asset than a protective hedge.
According to the IMF, this dynamic threatens market stability and raises the possibility of “contagion across financial markets.”
The institution warns that any sharp fall in the Bitcoin market could prompt investors to neglect risk mitigation and potentially pull back from equity investments.
“The spillover effects, if reversed — that is, from the S&P 500 to Bitcoin — would on average be similar, indicating that sentiment in one market is transmitted to the other in meaningful ways,” the report states.
Pointing to systemic concerns, the IMF recommends establishing a global regulatory framework to provide oversight and help prevent risks to the financial system.
In December, CNBC’s Fast Money trader Brian Kelly said Bitcoin and the Nasdaq were trading in sync. He noted that the 30-day correlation at that time was around 47%, with Bitcoin often serving as a leading indicator for the stock index.