Bitcoin is dragging down U.S. stocks? The IMF said the decline in cryptocurrencies has led to a rise in investor risk aversion

Since the beginning of 2022, as the adoption of cryptocurrencies has increased, the correlation between Bitcoin and the S&P 500 index seems to have strengthened, suggesting that the cryptocurrency with the largest market capitalization is more of a risk asset. Since the beginning of 2020, Bitcoin and the S&P 500 have yielded 495% and 49%, respectively.

Liz Ann Sonders, chief investment officer of Charles Schwab Financial, said that in fact, the 20-day rolling correlation between Bitcoin and the S&P 500 index broke through 0.7, the highest level since October 2020.

The International Monetary Fund (IMF) noted that before the outbreak, Bitcoin and Ethereum, the second largest digital currency, had little to do with major stock indices. But that changed after the Fed and other central banks took an unprecedented monetary response to covid-19.

The IMF said that "against the backdrop of loose global financial conditions and increased investor risk appetite, cryptocurrency prices and U.S. equities have soared." ”

Lennard Neo, head of research at Stack Funds, believes that in the face of market uncertainty, Bitcoin "has recently behaved more like a risk asset." He added: "If Bitcoin is an inflation hedge or risk asset, then the market is still divergent and in the current macro environment, more volatility is expected in the short term." ”

According to the IMF, Bitcoin's volatility could explain fluctuations of about one-sixth of the S&P 500 during the pandemic, and about one-tenth of the S&P 500's returns. Therefore, the fall in the price of Bitcoin will increase the disgust of investors, leading to a fall in the stock market.

In addition, during the pandemic, the spillover effect of the stablecoin Tether (a digital currency pegged to the US dollar) on global equity markets increased during the pandemic, but remained smaller than bitcoin, which could explain a 4% to 7% change in returns and volatility in the US stock market.

Who is entering the digital asset market?

The use of cryptocurrencies and blockchain technology in developing countries is increasing. For example, the Turkish lira has depreciated sharply against the US dollar against the backdrop of soaring inflation, and Turkey appears to be abandoning fiat currencies in favor of buying digital assets as the average daily trading volume of cryptocurrencies using the lira climbs to nearly $2 billion. In addition, Mexico and Jamaica are testing central bank digital currencies (CBDCs), and Nigeria also launched a CBDC last year.

Of course, El Salvador was the first country to turn Bitcoin into fiat currency, and it has already participated in cryptocurrencies in a variety of ways, including buying and holding Bitcoin.