Kazakhstan: Nationwide blackout sparks global Bitcoin crash
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The market value of crypto-assets has increased dramatically in recent years, rising from £14.6bn in 2017 to £2.19tr in November 2021. According to a new report from the International Monetary Fund (IMF), the widespread adoption “could pose financial stability risks given their highly volatile prices”. According to the IMF, a particular trend to note is the way cryptocurrencies and stock markets have begun to seemingly move together. Before the pandemic, tokens such as Bitcoin and Ether had little link to major markets meaning many saw them as a way of diversifying and avoiding the risk of swings in other investments.
Such a role has previously been taken by assets such as gold – seen as a traditional safe haven in times of market turmoil.
Now, though, the two seem to increasingly interlink with the IMF finding Bitcoin volatility explained about one-sixth of volatility in the US’s S&P 500 index.
This means a sharp decline in Bitcoin could lead to a fall in stock markets by hitting investor confidence.
The reverse is also true with changing confidence around stock markets impacting the value of Bitcoin.
Cryptocurrencies and stock markets are increasingly moving together (Image: Getty)
The IMF found Bitcoin had shown an increasing correlation with stock markets since the pandemic (Image: IMF)
One previous example of the two moving together came after an announcement by the US central bank the Federal Reserve that it would start to tighten monetary policy, signalling future interest rate rises.
In response, both Bitcoin and stock markets took a sharp dip.
This week, Jerome Powell, chair of the Federal Reserve, took a more relaxed stance, saying “we probably remain in an era of very low interest rates”.
Both Bitcoin and the Dow Jones subsequently rose in the hours following.
Writing in a blog post on the findings, the IMF said: “Our analysis suggests that crypto assets are no longer on the fringe of the financial system.
Some had seen crypto as a hedge against market turmoil like gold (Image: Getty)
“Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption.”
The role of crypto as a hedge against falls in the stock market would also be removed with investors instead being hit by a loss on both assets.
The IMF says more research is needed to understand the connections between crypto and equity markets with the exact relationship still not fully understood.
One conclusion they do draw though is that the increased interconnection means the current “light touch” approach to regulation needs to be reviewed.
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The Bank of England is consulting on launching its own digital pound (Image: Getty)
Many economies are now working out how to handle the widespread adoption of cryptocurrencies and incorporate this into their financial systems.
The Bank of England has even begun consulting on the idea of launching its own central bank digital currency (CBDC), dubbed Britcoin.
This week though the House of Lords poured cold water on the concept with the Lord Economic Affairs Committee saying it was a “solution in search of a problem” that could pose “significant risks.”
Additional reporting by Maria Ortega.