## INTRODUCTION (gfsnea2022001)

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**Canonical URL:** [INTRODUCTION (gfsnea2022001)](https://www.imf.org/-/media/files/publications/gfs-notes/2022/english/gfsnea2022001.pdf)

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---

### Overview
- Crypto assets have grown rapidly since 2009, with total market capitalization rising from less than $20 billion in January 2017 to more than $3 trillion in November 2021.
- Much of the increase occurred during the COVID-19 pandemic, with a twentyfold increase in market capitalization between March 2020 and November 2021.
- Adoption has been pronounced in emerging market economies, with nine of the top 10 major adopters in 2021 being emerging market economies.
- Bitcoin and Ether were among the world’s top 20 traded assets in September 2021; Bitcoin and Ether accounted for about 40 and 20 percent of total crypto market cap in November 2021, respectively, while Tether accounted for about three percent.
- El Salvador adopted Bitcoin as legal tender in September 2021.

### Key questions analyzed
- How correlated are movements in crypto and equity markets? Has this correlation changed over time?
- How strong are the spillovers between crypto and equity markets, and have they increased over time?

### Data and methods (summary)
- Sample period: Jan 2017–Nov 2021 (pre-pandemic: Jan 2017–Dec 2019; post-pandemic: Jan 2020–Nov 2021 or Jan 2020–Dec 2021 as specified for some estimations).
- Assets analyzed: Bitcoin, Tether (stablecoin), US equity indices (S&P 500, Russell 2000), and MSCI emerging markets index; oil prices and the US 10-year bond yield included as exogenous controls in VAR-X models; VIX included in some specifications for returns.
- Econometric approach: Diebold-Yilmaz spillover framework estimated via vector autoregression (VAR) and rolling-window generalized variance decompositions (forecast horizon 10 days; rolling window 100 days; robustness checks with 20-day horizon and 150-day window).
- Returns defined as one-day log differences; volatility based on intra-day prices with volatility = 0.361*[Ln (High Price) – Ln(Low Price)^2] following Diebold-Yilmaz (2012).

### Policy context and motivation
- Previously limited interconnectedness was judged to imply minimal financial stability risk, but exponential growth and greater adoption since 2020 raise potential systemic concerns due to extreme price volatility, rising use of leverage, and financial institutions’ direct and indirect exposures.
- Because much of the crypto ecosystem is relatively unregulated, significant crypto-driven financial disruptions could be largely outside the control of central banks and regulatory authorities.

### Major findings: Correlations and descriptive patterns
- Correlations between crypto assets and equity markets have increased notably over 2017–2021.
- Volatility:
  - The intra-day price volatility of Bitcoin and Ether is now about 4 to 8 times more correlated with the volatility of the main US equity market indices (S&P 500, Nasdaq, Russell 2000) compared to 2017–19.
  - The volatility correlation between Tether and US equity indices rose from being close to zero in 2017–19 to about 0.3-0.4 in 2020–21.
  - Volatility correlation with US stock markets is highest for Bitcoin followed by Tether in absolute terms.
  - Volatility correlation between Bitcoin and Ether and the MSCI emerging markets index increased three to four-fold between the pre- and post-pandemic periods; Tether’s correlation with MSCI increased by more than that.
- Returns:
  - Correlations in returns have increased significantly, particularly for Bitcoin.
  - In 2020–21, Bitcoin and Ether show positive and similar correlations with US equity indices, while Tether’s correlation with major equity indices is lower but negative in 2020–21 (suggesting a risk diversification role).
- Relative to other asset classes, the increase in correlations between crypto returns and equity returns since 2020 has been more pronounced than for the 10-year US Treasury ETF, gold, and selected currencies (euro, renminbi, US dollar). Correlation with corporate bonds increased significantly; Bitcoin and Ether have positive correlations with high-yield bonds and negative correlations with investment grade bonds, while Tether shows the reverse pattern.
- Crypto price movements became more correlated with estimated misalignment in US equity prices compared to pre-pandemic years.

### Major findings: Spillovers in the United States (2017–19 vs 2020–21)
- Spillovers increased in both directions—crypto to equities and equities to crypto.
- Volatility spillover changes (percentage points):
  - From Bitcoin to S&P 500: increased by about 16 percentage points.
  - From Tether to S&P 500: increased by about 6 percentage points.
  - From S&P 500 to Bitcoin and Tether: increased by 13-15 percentage points.
- Return spillover changes (percentage points):
  - From Bitcoin to S&P 500: increased by 10 percentage points.
  - From Tether to S&P 500: increased by 6 percentage points.
  - From S&P 500 to Bitcoin and Tether: increased by 12-13 percentage points.
- Contribution magnitudes in the post-pandemic period:
  - Bitcoin volatility explains about one-sixth of the volatility in US equity indices.
  - Bitcoin returns explain about one-tenth of the variation in US equity returns.
  - Tether’s contribution to US equity price movements averages about 4-7 percent for volatility and returns.
- Dynamic/rolling-window results:
  - Pair-wise directional volatility spillovers rose sharply during episodes of market stress (e.g., March 2020 market collapse).
  - Equity-to-crypto volatility spillovers often exceeded crypto-to-equity spillovers in magnitude during stress episodes.
  - Volatility spillovers are generally larger than return spillovers, indicating cross-market volatility shocks have more impact than return shocks.

### Major findings: Spillovers in emerging markets (MSCI)
- VAR-X includes MSCI emerging markets index, Bitcoin, Tether, S&P 500, Russell 2000; oil prices and US10-year yield as exogenous controls.
- Changes in spillovers between 2017–19 and 2020–21:
  - Volatility spillovers from Bitcoin to MSCI: increased by 12 percentage points.
  - Volatility spillovers from MSCI to Bitcoin: increased by 5 percentage points.
  - Return spillovers: the contribution of both Bitcoin and the MSCI index to each other’s returns increased by about 8-9 percentage points.
- Absolute contributions in 2020–21:
  - Bitcoin explains about 10 percent of the volatility in the MSCI emerging markets index.
  - Bitcoin explains about 8 percent of the variation in MSCI returns.
  - MSCI explains about 7-9 percent of the variation in Bitcoin’s volatility and returns.
- Tether-MSCI interconnectedness:
  - Volatility spillovers from Tether to MSCI increased by about 5 percentage points.
  - Return spillovers from Tether to MSCI increased by 4 percentage points.
  - MSCI’s contribution to Tether’s volatility increased by 8 percentage points; to Tether’s returns increased by 6 percentage points.
- Spillovers between crypto assets and US equity indices remain qualitatively similar when the model is extended to emerging markets.
- Spillovers from S&P 500 to MSCI remain the largest across asset classes but have declined over time, indicating emerging market equity markets are increasingly influenced by crypto price swings.

### Interpretation and implications
- Crypto assets appear to have moved from a fringe asset class toward greater integration with mainstream equity markets.
- The strengthening of correlations and spillovers likely reflects:
  - Increased adoption of crypto assets by retail and institutional investors since Q1 2020.
  - Growing acceptance of crypto assets for payment and investment purposes.
  - Easy global financial conditions and increased investor risk appetite during the pandemic.
- Spillovers rise during episodes of market volatility, increasing the potential for crypto-driven contagion during stress periods.
- Stablecoins (e.g., Tether) show mixed properties: negative correlation with equity returns in 2020–21 suggesting a diversification role, but potential risks remain (observed failure rates and questions about full backing at all times).

### Policy recommendations and monitoring
- Regulators and supervisors need to:
  - Closely monitor activity in crypto markets.
  - Monitor exposures of financial institutions to crypto assets (direct and indirect).
  - Design appropriate regulatory policies to mitigate systemic risks emanating from crypto price spillovers.
- Given the relatively unregulated nature of much of the crypto ecosystem, significant crypto price volatility could create financial stability risks that may be difficult for central banks and regulatory authorities to control.

*Source: INTRODUCTION (gfsnea2022001) — IMF | Monetary and Capital Markets, Jan 2017–Nov 2021 analysis as presented in the supplied content.*

### CONCLUSION (gfsnea2022001)

### Key findings on crypto–equity interconnectedness
- Crypto asset market capitalization is growing rapidly amid increasing demand from retail and institutional investors.
- Interconnectedness between crypto assets and equity markets has increased significantly in the post-pandemic period.
- Bitcoin and Tether individually explain about 12-16 percent of the variation in the volatility of global equity prices.
- Bitcoin and Tether individually explain about 7-11 percent of the variation in global stock returns.
- Spillovers from crypto to equity markets tend to increase during episodes of greater market volatility.
- Spillovers are significant for emerging markets, given their increased adoption of crypto assets in recent months.

### Implications for regulation and oversight
- The hitherto “light touch” regulatory approach toward crypto assets needs to be reviewed.
- Regulations should correspond to the risks crypto assets pose (BIS 2021).
- Oversight of the crypto ecosystem needs to be strengthened, including by addressing data gaps (IMF 2021).

### Research needs and unanswered questions
- Further research is needed to better understand the channels of spillovers between crypto and equity markets.
- Investigate the direction of causality between crypto assets and equity markets.
- Assess the risks crypto assets could pose to the financial system more broadly.
- Key drivers of increased interconnectedness to explore include:
  - Growing acceptance of crypto-related platforms and investment vehicles in the stock market and at the over-the-counter market.
  - Growing Bitcoin adoption by retail and institutional investors who have positions in both equity and crypto markets.

### Empirical approach and data notes (summary)
- Interconnectedness and spillovers estimated using the Diebold-Yilmaz (2012 and 2014) model based on forecast error variance decompositions (FEVD) from a VAR.
- The generalized forecast error variance decomposition (GVD) method of Pesaran and Shin (1998) is used to identify the VAR; GVDs are order-invariant and allow for correlated shocks.
- Two transformations of variables used as inputs to the VAR: returns and volatility.
  - Returns: percentage daily change in the closing price of crypto assets and equity indices, excluding trading holidays.
  - Volatility: standard deviation of absolute percentage changes in intra-day prices.
- The VAR is estimated over a rolling window of 100 days over two sample periods: Jan 2017–Dec 2019 and Jan 2020–Nov 2021.
- Data sources for variables used in the VAR include CryptoCompare and Yahoo Finance (variables listed include Bitcoin-USD, Tether-USD, Ether-USD, S&P 500 Index, Nasdaq Index, Russell 2000 Index, 10-Year Yield, VIX Index, Oil Price Index, MSCI Emerging Market Index).

*IMF | Monetary and Capital Markets — CONCLUSION (gfsnea2022001).*

### INTRODUCTION

### INTRODUCTION

### Overview
- Crypto assets have grown rapidly since 2009, with total market capitalization rising from less than $20 billion in January 2017 to more than $3 trillion in November 2021.
- Much of the increase occurred during the COVID-19 pandemic, with a twentyfold increase in market capitalization between March 2020 and November 2021.
- Adoption has been pronounced in emerging market economies, with nine of the top 10 major adopters in 2021 being emerging market economies.
- Bitcoin and Ether were among the world’s top 20 traded assets in September 2021; Bitcoin and Ether accounted for about 40 and 20 percent of total crypto market cap in November 2021, respectively, while Tether accounted for about three percent.
- El Salvador adopted Bitcoin as legal tender in September 2021.

### Key questions analyzed
- How correlated are movements in crypto and equity markets? Has this correlation changed over time?
- How strong are the spillovers between crypto and equity markets, and have they increased over time?

### Data and methods (summary)
- Sample period: Jan 2017–Nov 2021 (pre-pandemic: Jan 2017–Dec 2019; post-pandemic: Jan 2020–Nov 2021 or Jan 2020–Dec 2021 as specified for some estimations).
- Assets analyzed: Bitcoin, Tether (stablecoin), US equity indices (S&P 500, Russell 2000), and MSCI emerging markets index; oil prices and the US 10-year bond yield included as exogenous controls in VAR-X models; VIX included in some specifications for returns.
- Econometric approach: Diebold-Yilmaz spillover framework estimated via vector autoregression (VAR) and rolling-window generalized variance decompositions (forecast horizon 10 days; rolling window 100 days; robustness checks with 20-day horizon and 150-day window).
- Returns defined as one-day log differences; volatility based on intra-day prices with volatility = 0.361*[Ln (High Price) – Ln(Low Price)^2] following Diebold-Yilmaz (2012).

### Policy context and motivation
- Previously limited interconnectedness was judged to imply minimal financial stability risk, but exponential growth and greater adoption since 2020 raise potential systemic concerns due to extreme price volatility, rising use of leverage, and financial institutions’ direct and indirect exposures.
- Because much of the crypto ecosystem is relatively unregulated, significant crypto-driven financial disruptions could be largely outside the control of central banks and regulatory authorities.

---

### Major findings: Correlations and descriptive patterns
- Correlations between crypto assets and equity markets have increased notably over 2017–2021.
- Volatility:
  - The intra-day price volatility of Bitcoin and Ether is now about 4 to 8 times more correlated with the volatility of the main US equity market indices (S&P 500, Nasdaq, Russell 2000) compared to 2017–19.
  - The volatility correlation between Tether and US equity indices rose from being close to zero in 2017–19 to about 0.3-0.4 in 2020–21.
  - Volatility correlation with US stock markets is highest for Bitcoin followed by Tether in absolute terms.
  - Volatility correlation between Bitcoin and Ether and the MSCI emerging markets index increased three to four-fold between the pre- and post-pandemic periods; Tether’s correlation with MSCI increased by more than that.
- Returns:
  - Correlations in returns have increased significantly, particularly for Bitcoin.
  - In 2020–21, Bitcoin and Ether show positive and similar correlations with US equity indices, while Tether’s correlation with major equity indices is lower but negative in 2020–21 (suggesting a risk diversification role).
- Relative to other asset classes, the increase in correlations between crypto returns and equity returns since 2020 has been more pronounced than for the 10-year US Treasury ETF, gold, and selected currencies (euro, renminbi, US dollar). Correlation with corporate bonds increased significantly; Bitcoin and Ether have positive correlations with high-yield bonds and negative correlations with investment grade bonds, while Tether shows the reverse pattern.
- Crypto price movements became more correlated with estimated misalignment in US equity prices compared to pre-pandemic years.

---

### Major findings: Spillovers in the United States (2017–19 vs 2020–21)
- Spillovers increased in both directions—crypto to equities and equities to crypto.
- Volatility spillover changes (percentage points):
  - From Bitcoin to S&P 500: increased by about 16 percentage points.
  - From Tether to S&P 500: increased by about 6 percentage points.
  - From S&P 500 to Bitcoin and Tether: increased by 13-15 percentage points.
- Return spillover changes (percentage points):
  - From Bitcoin to S&P 500: increased by 10 percentage points.
  - From Tether to S&P 500: increased by 6 percentage points.
  - From S&P 500 to Bitcoin and Tether: increased by 12-13 percentage points.
- Contribution magnitudes in the post-pandemic period:
  - Bitcoin volatility explains about one-sixth of the volatility in US equity indices.
  - Bitcoin returns explain about one-tenth of the variation in US equity returns.
  - Tether’s contribution to US equity price movements averages about 4-7 percent for volatility and returns.
- Dynamic/rolling-window results:
  - Pair-wise directional volatility spillovers rose sharply during episodes of market stress (e.g., March 2020 market collapse).
  - Equity-to-crypto volatility spillovers often exceeded crypto-to-equity spillovers in magnitude during stress episodes.
  - Volatility spillovers are generally larger than return spillovers, indicating cross-market volatility shocks have more impact than return shocks.

---

### Major findings: Spillovers in emerging markets (MSCI)
- VAR-X includes MSCI emerging markets index, Bitcoin, Tether, S&P 500, Russell 2000; oil prices and US10-year yield as exogenous controls.
- Changes in spillovers between 2017–19 and 2020–21:
  - Volatility spillovers from Bitcoin to MSCI: increased by 12 percentage points.
  - Volatility spillovers from MSCI to Bitcoin: increased by 5 percentage points.
  - Return spillovers: the contribution of both Bitcoin and the MSCI index to each other’s returns increased by about 8-9 percentage points.
- Absolute contributions in 2020–21:
  - Bitcoin explains about 10 percent of the volatility in the MSCI emerging markets index.
  - Bitcoin explains about 8 percent of the variation in MSCI returns.
  - MSCI explains about 7-9 percent of the variation in Bitcoin’s volatility and returns.
- Tether-MSCI interconnectedness:
  - Volatility spillovers from Tether to MSCI increased by about 5 percentage points.
  - Return spillovers from Tether to MSCI increased by 4 percentage points.
  - MSCI’s contribution to Tether’s volatility increased by 8 percentage points; to Tether’s returns increased by 6 percentage points.
- Spillovers between crypto assets and US equity indices remain qualitatively similar when the model is extended to emerging markets.
- Spillovers from S&P 500 to MSCI remain the largest across asset classes but have declined over time, indicating emerging market equity markets are increasingly influenced by crypto price swings.

---

### Interpretation and implications
- Crypto assets appear to have moved from a fringe asset class toward greater integration with mainstream equity markets.
- The strengthening of correlations and spillovers likely reflects:
  - Increased adoption of crypto assets by retail and institutional investors since Q1 2020.
  - Growing acceptance of crypto assets for payment and investment purposes.
  - Easy global financial conditions and increased investor risk appetite during the pandemic.
- Spillovers rise during episodes of market volatility, increasing the potential for crypto-driven contagion during stress periods.
- Stablecoins (e.g., Tether) show mixed properties: negative correlation with equity returns in 2020–21 suggesting a diversification role, but potential risks remain (observed failure rates and questions about full backing at all times).

### Policy recommendations and monitoring
- Regulators and supervisors need to:
  - Closely monitor activity in crypto markets.
  - Monitor exposures of financial institutions to crypto assets (direct and indirect).
  - Design appropriate regulatory policies to mitigate systemic risks emanating from crypto price spillovers.
- Given the relatively unregulated nature of much of the crypto ecosystem, significant crypto price volatility could create financial stability risks that may be difficult for central banks and regulatory authorities to control.

---

*Source: INTRODUCTION (gfsnea2022001) — IMF | Monetary and Capital Markets, Jan 2017–Nov 2021 analysis as presented in the supplied content.*

### CONCLUSION

### CONCLUSION

### Key findings on crypto–equity interconnectedness
- Crypto asset market capitalization is growing rapidly amid increasing demand from retail and institutional investors.
- Interconnectedness between crypto assets and equity markets has increased significantly in the post-pandemic period.
- Bitcoin and Tether individually explain about 12-16 percent of the variation in the volatility of global equity prices.
- Bitcoin and Tether individually explain about 7-11 percent of the variation in global stock returns.
- Spillovers from crypto to equity markets tend to increase during episodes of greater market volatility.
- Spillovers are significant for emerging markets, given their increased adoption of crypto assets in recent months.

### Implications for regulation and oversight
- The hitherto “light touch” regulatory approach toward crypto assets needs to be reviewed.
- Regulations should correspond to the risks crypto assets pose (BIS 2021).
- Oversight of the crypto ecosystem needs to be strengthened, including by addressing data gaps (IMF 2021).

### Research needs and unanswered questions
- Further research is needed to better understand the channels of spillovers between crypto and equity markets.
- Investigate the direction of causality between crypto assets and equity markets.
- Assess the risks crypto assets could pose to the financial system more broadly.
- Key drivers of increased interconnectedness to explore include:
  - Growing acceptance of crypto-related platforms and investment vehicles in the stock market and at the over-the-counter market.
  - Growing Bitcoin adoption by retail and institutional investors who have positions in both equity and crypto markets.

### Empirical approach and data notes (summary)
- Interconnectedness and spillovers estimated using the Diebold-Yilmaz (2012 and 2014) model based on forecast error variance decompositions (FEVD) from a VAR.
- The generalized forecast error variance decomposition (GVD) method of Pesaran and Shin (1998) is used to identify the VAR; GVDs are order-invariant and allow for correlated shocks.
- Two transformations of variables used as inputs to the VAR: returns and volatility.
  - Returns: percentage daily change in the closing price of crypto assets and equity indices, excluding trading holidays.
  - Volatility: standard deviation of absolute percentage changes in intra-day prices.
- The VAR is estimated over a rolling window of 100 days over two sample periods: Jan 2017–Dec 2019 and Jan 2020–Nov 2021.
- Data sources for variables used in the VAR include CryptoCompare and Yahoo Finance (variables listed include Bitcoin-USD, Tether-USD, Ether-USD, S&P 500 Index, Nasdaq Index, Russell 2000 Index, 10-Year Yield, VIX Index, Oil Price Index, MSCI Emerging Market Index).

*IMF | Monetary and Capital Markets — CONCLUSION*

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_Source: https://www.imf.org/-/media/files/publications/gfs-notes/2022/english/gfsnea2022001.pdf_