For the past few weeks, the crypto market is suffering amid rising inflation and global tensions. Billions of dollars have been liquidated in the crypto market. To manage their risk, crypto investors and traders have tried diversifying their portfolios. The stock market and cryptocurrency market have, however, continued to plummet over the last few weeks. Therefore, the European Central Bank has also discussed the risks associated with crypto.
The correlation between cryptocurrencies and the stock market is gaining attention in the past few weeks. Both of these markets faced a bearish spell for seven consecutive weeks. As a result, the European Central Bank has warned consumers and pointed out a few instances where correlations have been particularly high. This report stresses the market conditions for March 2020, December 2021, and May 2022.
Furthermore, the European Central Bank (ECB) advised investors against diversifying their portfolios with cryptocurrencies. This is because cryptocurrencies are following traditional risky assets like stocks and bonds. Thus, their usefulness has decreased in portfolio diversification. The non-correlation of crypto with mainstream financial products was one of its most significant claims.
Investors and consumers are suffering due to the plunging financial markets. Therefore, they moved to crypto in search of relief. However, the digital asset industry was unable to fetch such results for them.
Cryptocurrencies are full of risks, states the European Central Bank
In spite of the risks associated with crypto, the Central Bank has clearly positioned itself against this asset. In a preview of its financial stability review, the bank emphasized crypto’s increasing correlation with mainstream assets. Furthermore, the bank believes that greater involvement of financial institutions in crypto could lead to its growth. Thus, this could lead to more financial instability.
Digital assets have nevertheless been used and consumers’ interest in them has increased simultaneously. Although there has been a limited connection between cryptocurrencies and the euro area banking sector, the ECB is concerned about the growing consumer interest. Trading services of cryptocurrencies are used by people from all over Europe, and the central bank views them as a potential threat to financial stability.
With every passing day, more firms are lending support to digital currencies. Therefore, the European Central bank believes that it is essential to fill regulatory gaps to mitigate any risks. The bank also pointed out that the trend of crypto lending is also growing, and it should be covered in existing financial regulations. Nonetheless, the ECB’s remarks on the potential systematic risks hold significance for the crypto industry and its future.