The high volatility of crypto and its valuation are not good for Nigeria’s financial stability, and that of others with the widespread adoption of digital assets. This is according to the International Monetary Fund (IMF).
In a blog post titled, ‘Crypto Prices Move More in Sync With Stocks, Posing New Risks, the fund noted that aside from the countries’ volatility and valuation, the countries’ increasing co-movement with equity markets, is also another concern.
Nigeria ranked sixth leading country in the world in terms of cryptocurrency adoption on Chainalysis’ 2021 Global Crypto Adoption Index. Vietnam, India, and Pakistan are the top three countries.
While arguing that the stronger association between cryptocurrency and equities was apparent in emerging market economies, IMF, in its blog post, said there was an increasing and sizable co-movement between crypto and equity markets that could cause shock, destabilising financial markets.
IMF’s blog post partly read: “The increased and sizable co-movement and spillovers between crypto and equity markets indicate a growing interconnectedness between the two asset classes that permits the transmission of shocks that can destabilise financial markets.
“Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread cryptocurrency adoption.”
Continuing, IMF explained that cryptocurrency assets, including Bitcoin, have matured to become an integral part of the digital asset revolution, raising financial stability concerns.
“Before the pandemic, crypto-assets such as bitcoin and ether showed little correlation with major stock indices. They were thought to help diversify risk and act as a hedge against swings in other asset classes.
“But this changed after the extraordinary central bank crisis responses of early 2020. Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.”
It said, “Increased crypto-stocks correlation raises the possibility of spillovers of investor sentiment between those asset classes. Indeed, our analysis, which examines the spillovers of prices and volatility between crypto and global equity markets, suggests that spillovers from Bitcoin returns and volatility to stock markets, and vice versa, have risen significantly in 2020–21 compared with 2017–19,” the post added.