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Bitcoin is a hedge is one of the most credible lies every told. In fact, many speculate that Bitcoin continues to eat into gold’smarket share.
However, the International Monetary Fund (IMF) has now said what we have always been saying, Bitcoin or any cryptocurrency, is not a hedge.
A hedge is supposed to be stable and has an inverse relationship with the market. Bitcoin is either of those two.
IMF said that there is an increasing correlation between crypto and stock markets. In a blog post on Tuesday last month, analysts from the IMF noted that, and I quote, Bitcoin and other crypto-assets “have matured from an obscure asset class with few users to an integral part of the digital asset revolution.”
However, the IMF argued that this acceptance has brought along with it the risks of financial instability due to a spillover between the volatile digital assets and equities.
: IMF’s blog post reads “Amid greater adoption, 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.”
New IMF research has indicated that while 2017-19 saw Bitcoin moving independently of the S&P 500, with their daily moves showing a meager 0.01 correlation coefficient, this changed once the pandemic hit. The measure jumped 3,600% to 0.36 in 2020-21, indicating that both asset classes had begun to move more in tandem than earlier.
A coefficient of 1 means the assets are moving in lockstep, while minus-1 would show they’re moving in opposite directions.
The economic shock the pandemic brought forced investors to turn to risky assets to stay afloat simply because they didn’t hav a choice. They couldn’t count on their jobs and their savings were losing value. Crypto was all the rage and with the lack of choice, they went there.
But the stronger correlation and the drastic and sustained dip that started in the last quarter of 2021 proved that Bitcoin is a risky asset. No amount of media and investor hype will change that.
Additionally, the organization found that Bitcoin’s volatility caused about one-sixth of the total S&P volatility along with about one-tenth of the variation in S&P 500 returns during the pandemic, highlighting an increased interconnectedness between both. It concluded that As such, a sharp decline in Bitcoin prices can increase investor risk aversion and lead to a fall in investment in stock markets.
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