|
|
Stocks and cryptocurrencies face a more volatile future as the two become increasingly linked and the U.S. Federal Reserve raises interest rates, the International Monetary Fund warned last week.
“The Fed needs to tighten financial conditions,” Tobias Adrian, IMF’s director of monetary and capital markets, said in a Yahoo! Finance interview.
“That means interest rates have to come up, risky asset prices have to come down, and that could be painful,” he said.
Markets could take as long as six months to adjust to higher interest rates, he added.
Crypto markets are heavily leveraged, which increases volatility, he noted. Equity markets also are heavy on debt and hedge funds and, increasingly, other institutional investors are putting money in both.
Due to a lack of detailed data or disclosure requirements, “investors often don’t know how much risk they’re taking,” he pointed out, adding that regulations are needed and will be forthcoming.
For stablecoins—cryptos with values tied to more stable assets, such as national currencies—some issuers should be required to hold a banking license because they offer services similar to banks, Adrian contended.
“Well-regulated banks and banks backstopped by the U.S. Federal Reserve work well,” he said. Lacking adherence to banking regulations, “it’s going to be difficult for them to be truly stable,” he warned.
Adrian also lauded the Fed’s effort to create a digital dollar.
“A central bank digital currency is an important bridge to the crypto asset universe and makes sure that federal reserve money is an important foundation for this emerging financial system,” he said.
TREND FORECAST: Speculators and investors will go their separate ways, as we described in “Bitcoin ETFs in Prep as SEC Highlights Path to Approval” (24 Aug 2021): investors will hew to stablecoins and regulated digital assets, while speculators will play on the unregulated free range where volatility reigns.
On the equities side, markets’ shift to more conservative investments (see related stories in this issue) will hit growth stocks and SPAC enthusiasm. There will be fewer market players among the retail sector which helped inflate the market bubble as they take heavy hits trying to buy on downs and sell on the ups.