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Since the start of the Covid-19 pandemic in March 2020, cryptocurrencies such as Bitcoin (BTC-USD) and Ethereum (ETH-USD) have been increasingly integrated into the Asian financial system, underscoring the need for additional regulation, the International Monetary Fund said in a last blog post.
Return and volatility correlations between cryptos and Asian equities were low before the pandemic, but have risen significantly since 2020, prompted by easy access to cheap borrowing via low interest rates and government stimulus payments. For example, return correlations of Bitcoin (BTC-USD) and Indian stock markets have increased 10-fold during the pandemic, “suggesting limited benefits of crypto’s risk diversification,” the IMF wrote.
In some context, Bitcoin (BTC-USD), the largest digital token by market cap, rallied wildly from the start of the pandemic to its peak in November 2021. During that time, the price surged over 1,000% to an all-time high of 68.9k $. But as central banks like the Federal Reserve and the European Central Bank tighten monetary policy to reduce inflationary pressures, Bitcoin gave up a large chunk of those gains, surging 302% to $20.64k as of Friday afternoon. Although the magnitude of BTC’s ongoing plunge is above pre-pandemic levels, it suggests that traders’ risk appetite is diminishing as fiscal aid wanes.
All in all, the growing relationship between cryptos and Asian equities poses certain risks to financial stability, the IMF has warned.
“Although the financial sector appears isolated from these sharp movements, future boom-bust cycles may not be so,” said the agency, which is open to the idea that digitization can boost financial inclusion. “Contagion could spread through individual or institutional investors who may hold both crypto and traditional financial assets or liabilities.”
The IMF said one cause of the increasing interdependence of crypto and Asian stock markets could be the potentially growing acceptance of crypto-focused platforms and investment vehicles on the exchange. Another reason could be the broad growth of crypto adoption by retail and institutional investors in Asia, it said.
There has also been a sharp increase in spillover effects from crypto-stock volatility in India, Vietnam and Thailand, which “signals a growing interdependence between the two asset classes that allows for the transmission of shocks that can impact financial markets,” according to the The IMF’s spillover methodology, developed in its January Global Financial Stability Note.
In turn, Asian authorities have increased their focus on crypto-related regulation as regulatory frameworks are already in the works in several countries, including India, Vietnam and Thailand, the IMF said. Towards the end of March, Thailand blocked the use of digital tokens as a means of payment, citing risks evolving in the burgeoning industry, including price volatility, cybertheft and money laundering.
India, meanwhile, has been very vocal over the past year in wanting to rein in the crypto industry to protect consumers. In fact, crypto trading volume in the country fell after digital asset tax laws went into effect in April.
Earlier (August 22), crypto liquidity started to recover as the stablecoin market cap stops falling.
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