Why Bitcoin And Ethereum Saw A Spike In Correlation With Asian Equities

The International Monetary Fund (IMF) published a study on the spike in positive correlation with Bitcoin (BTC), Ethereum (ETH), and Asian equities. The financial organization claims digital assets began an accelerated integration with the region during the pandemic as more people traded them looking to generate yield.

From 2020 to its all-time high in 2021, the crypto total market cap increased by over 20-fold which led Bitcoin and Ethereum into price discovery. As seen in the chart below, the total trading volume for cryptocurrencies rose very close to $900 billion from below $100 billion at its peaked in 2021.

The regions with the highest trading volume are the Americas and Europe. The Middle East and Central Asia, EM Asia, and AE Asia are below other regions. However, the IMF claims adoption of cryptocurrencies in Asia could pose a systematic risk for the financial world.

If the price of Bitcoin and the crypto market reclaim their previous levels, and re-entered price discovery, the financial institution believes that there could be negative consequences. If digital assets were to rise and crash as they did over the past year, “contagion could spread through individual or institutional investors”.

As cryptocurrencies trend lower these investors would allegedly “rebalance their portfolios, possibly causing financial market volatility or even default on traditional liabilities”, the IMF said. In that sense, the financial institution shared the chart below to show the contrast between the price of Bitcoin and Asian stock indexes.

From 2020 until 2022, this correlation seems to be trending upward with Thailand and Vietnam showing the highest positive correlation. This has translated into similar price action for Bitcoin and traditional equities in these countries.

In India, the correlation between the price of Bitcoin and local equities has increased by 10-fold with a 3-fold spike in volatility correlations. The financial institution believes that if the price of Bitcoin decreases or increases, there could be “spillovers of risk sentiment”.

The financial institution suggests that these “spillovers” are already happening in Asia. Therefore, authorities in the region have been working on implementing a regulatory framework to allegedly mitigate risk.

The financial institution failed to mention that Bitcoin has been showing a positive correlation with the performance of major equities indexes across the world, the phenomenon is not limited to Asia. As seen below, the price of BTC has been moving in tandem with the Nasdaq 100 since the start of 2022.

The positive correlation has been attributed to current macroeconomic conditions. These indexes often move-in tandem with macroeconomic events, such as the one the market has experienced since 2020.

Therefore, the positive correlation between Bitcoin and Asia equities could also be attributed to the cryptocurrency reaching high adoption levels rather than a tale sign of potential financial risk.