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Shock as Bitcoin slides in line with stocks

  • The crypto currency is moving in line with stock prices, rather than pre-pandemic times.
  • Concerns raised that the US$2 trillion sector could destabilise financial markets.
  • IMF says there’s been increased co-movement and spillovers between crypto and equity markets.

There has been growing co-movement and spillovers between crypto assets and equity markets, raising concerns the US$2 trillion sector could shock and destabilise traditional financial markets.

The International Monetary Fund has warned that Bitcoin’s movement is more in line with stock prices rather than moving independently like it did in pre-pandemic times.

It also said there is a growing interconnectedness between the two asset classes.

Historically, cryptocurrencies like Bitcoin have been viewed as being unconnected to major equity markets and have been used to act as a hedge against swings in other asset classes like gold and other major currencies. 

However, as interest rates sit at historic lows at near 0%, investors have become attracted to riskier assets to garner higher returns.

Unlike most traditional currencies and asset classes, one of the chief characteristics of Bitcoin is that there is a finite number of the digital coins and only 21 million will ever be issued and can be mined.

Bitcoin’s mysterious inventor Satoshi Nakamoto designed the cryptocurrency in such a way that the number of Bitcoins minted per block is reduced by 50% after every 210,000 blocks, or about once every four years.

While the 21 million ceiling is only likely to be reached in 2140, as the crypto evolves it’s possible that Bitcoin could function like bars of gold. 

However, whether it will be as volatile is unclear.

The IMF estimates that Bitcoin’s erraticity is the reason for about one-sixth of S&P 500 volatility during the COVID-19 pandemic, and about one-tenth of the variation in S&P 500 returns.

While cryptos are primarily used to buy and sell goods and services, they possess no real intrinsic value. Fiat money, which is issued by sovereign governments, also has no intrinsic value but its supply is not limited. Money based on a commodity such as gold is called commodity money and its physical supply is restricted to a slowly increasing but finite quantity.

About one in five Aussies have invested in digital currencies and Bitcoin and Ethereum are the two most well-known digital coins in Australia, followed by Dogecoin, as reported by Grafa.

There has been a sharp sell-off in crypto since November which has caused the value of the digital assets to crash from nearly US$3 trillion to about US$2 trillion. However, dispute this, their value is still some four times as high as it was in 2017.

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