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Bitcoin and other digital currencies are increasingly moving in tandem with other financial markets and, therefore, are no longer as good a hedge for other investments, an analysis by the International Monetary Fund (IMF) has found.
“The correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits and raises the risk of contagion across financial markets,” the IMF’s blog noted last week.
Crypto served as a better hedge before the COVID era, Politico wrote in detailing the IMF’s findings, but the new report quashes crypto fans’ continuing claims that digital currencies still make a good alternative to gold as a store of wealth in uncertain times. (See “Hedge Funds Going Long on Crypto,” 22 Jun 2021).
The growing correlation between digital currencies and conventional financial markets, as well as the anonymity of crypto trades and assets, makes regulation and supervision of digital assets even more urgent, the IMF noted.
The Basel Committee on Banking Supervision, an international supervisory group, has suggested regulators set stiff capital reserve requirements for financial institutions dealing in crypto, as we reported in “Regulators Urge Tightest Rules for Crypto” (15 Jun 2021).
The European Commission has said it will consider adopting the recommendation.
TRENDPOST: The IMF’s warning about crypto as a hedge underscores the forecast we made in “Regulators Urge Tightest Rules for Crypto” (15 Jun 2021) and elsewhere that as governments introduce stablecoins—digital coins whose value is tied to national currencies—investors will gravitate to their stability, while speculators will continue to gamble on less restricted cryptos.
The regulated market will give legitimacy to cryptocurrencies, while the less-regulated market will give play to thrill-seekers and remain the territory of innovation.