The European Central Bank (ECB) has warned that the high correlation between cryptocurrency and stock markets will no longer allow diversification of the investment portfolio with digital assets.
The ECB published statementwhich states that an increase in the correlation between crypto assets and stocks, similar to the current one, was observed during the pandemic crisis of March 2020 and during the period of increased sell-offs in December 2021 and May 2022.
The regulator states that market correlation is a common practice during difficult economic situations. Cryptocurrency markets during such periods often showed dynamics similar to the dynamics of quotes in the stock markets. The ECB said that cryptocurrencies are not the best way to hedge risk right now:
“The growing correlation of crypto asset prices with major risky financial assets during periods of market stress calls into question their usefulness for portfolio diversification.”
The regulator noted that in recent years, the crypto industry has become part of the traditional financial system. And that is why it can no longer serve its original purpose of hedging risks during times of volatility in the traditional asset market. As cryptocurrencies increasingly correlate with traditional assets during times of uncertainty.
The ECB invites crypto investors to consider investing in less risky assets. Many stock market investors have added cryptocurrencies to their portfolios. As investments in stocks and bonds have suffered a wide-ranging fall, the ECB says, investors are already moving assets into fiat currencies to invest in more stable assets.
Celsius Network CEO Alex Mashinsky disagrees with the ECB and believes that bitcoin and ether in 2022 will break the correlation with the traditional stock market and reach all-time highs. Therefore, he left the stock market for crypto assets.