The interconnection of bitcoin with the Stock Exchanges increases the risks of contagion

Its staunchest defenders insist that bitcoin has come to end the central bank’s monopoly on money issuance. But the decentralized and independent nature of cryptocurrency, so often extolled by its supporters, may be running out of steam. This is at least the International Monetary Fund’s estimate. The entity has warned that the Stock Exchanges and the bitcoin walk more and more hand in hand, that is, their ups and downs are more correlated.

This is not to say that they move in unison, but it does mean that their courses tend to be more coincident. For example, in the last 12 months, bitcoin has risen 25%, while the US S&P 500 has risen 24%, and the Nasdaq, the technology index, 23%. It is a fact that the borders seem to be blurred. The number of individuals investing in both markets is growing; The first exchange-traded fund (ETF) linked to bitcoin was launched on the New York Stock Exchange in October, where Coinbase, a broker for buying and selling cryptocurrencies, is also listed. In addition, there are companies that have made buying bitcoins a way to diversify their portfolio, including the electric car maker Tesla, from the controversial Elon Musk, the richest man in the world.

The IMF sees in this interconnection the germ of new threats. “The correlation of crypto assets with traditional holdings such as stocks has increased significantly, limiting the perceived benefits of risk diversification and increasing the risk of contagion in financial markets,” their study notes.

In other words, bitcoin would no longer be a safe haven value like gold, bonds or currencies, more protected when the storm hits the Stock Exchanges, but part of those that end up soaked, something that did not happen in such an obvious way before the pandemic. “This changed after the extraordinary responses to the crisis from central banks in early 2020. Cryptocurrency prices and US stocks surged amid expansive global financial conditions and an increased appetite for risk,” explains the research.

In recent months, the Federal Reserve’s announcements that it would tighten its monetary policy have been a good example of the thesis defended by the IMF. Both stocks and bitcoin received the news with sharp falls. This joint shock wave, being larger than if they were separately, is more powerful “Our analysis suggests that crypto assets are no longer outside the financial system. Given their volatility and relatively high valuations, their larger joint move could soon pose risks to financial stability, especially in countries with widespread crypto adoption. “

The institution therefore believes that investors in traditional stocks can no longer completely ignore the evolution of bitcoin if they want to protect their savings. “A sharp drop in bitcoin prices can increase investors’ aversion to risk and cause a drop in investment in equity markets,” he says.

Despite what the IMF pointed out, the stock markets and bitcoin are in very different moods right now. As US stocks hover around the all-time highs, the cryptocurrency has lost a third of its value since its peak of $ 69,000 in November. A bitcoin was exchanged this Wednesday for almost $ 43,000, and its total capitalization exceeds 800,000 million euros, similar to that of Facebook.