IMF worried about significant rise in crypto-equity correlations in Asia

IMF officials call for regulation as crypto trading volume, and co-movement with equity markets, has surged in the region.

Officials from the International Monetary Fund (IMF) showed significant rise in crypto-equity correlations in Asia and worry about the risks it poses, highlighting need for an extent of integration of crypto into the financial system.

“As Asian investors piled into crypto during the pandemic, the correlation between the performance of the region’s equity markets and crypto assets has increased”, accompanied by “a sharp rise in crypto-equity volatility spillovers” in several countries like India, Vietnam, and Thailand. “This indicates a growing interconnectedness between the two asset classes that permits the transmission of shocks that can impact financial markets”, they wrote.

“While the returns and volatility correlations between Bitcoin and Asian equity markets were low before the pandemic, these have increased significantly since 2020. For example, the return correlations of Bitcoin and Indian stock markets have increased by 10-fold over the pandemic, suggesting limited risk diversification benefits of crypto. The volatility correlations have increased by 3-fold suggesting possible spillovers of risk sentiment among the crypto and equity markets”, shows the research.

Given the circumstances, the IMF officials suggest that “crypto regulation should be closely coordinated across jurisdictions” and “tailored to the main uses of such assets within the countries”, while authorities “should establish clear guidelines on regulated financial institutions and seek to inform and protect retail investors”.