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Cryptocurrency correlations are high, says the European Central Bank  

Crypto
TL;DR Breakdown
  • The European Central Bank continues to criticize cryptocurrencies.
  • ECB disapproves of crypto for portfolio diversification.
  • Increasing institutional interest might challenge financial stability, states the Central Bank.

The past few weeks and months have emphasized the correlation between cryptocurrencies and the stock market. Therefore, the European Central Bank (ECB) has warned consumers and investors of this phenomenon. The Central Bank pointed out a few instances where the correlation was at its peak. It includes stressing market conditions of March 2020, December 2021, and May 2022. All three periods witnessed high sell-offs from the investing community.

Moreover, the Central Bank advised against the use of cryptocurrencies by investors to diversify their portfolios. The currency is moving along with traditional assets and stocks. Several experts have criticized this development in the sector. Previously, digital assets were advocated for their uncorrelation with stocks in difficult traditional market dynamics. However, this claim is no longer valid.

People have suffered losses in stocks and bonds. They have moved towards digital assets, hoping for recovering their losses. But the dull market conditions are witnessed in all forms of financial markets. Also, the investing community is in search of more positive results, but crypto has been unable to produce that for them in the short term.

The European Central Bank continues to call cryptocurrency highly risky

The Central Bank has positioned itself clearly against crypto amid the risks associated with these assets. Recently, the bank emphasized its increasing correlation with conventional assets in the preview of its financial stability review. Moreover, the bank believes that the increased involvement of financial organizations with digital currencies could lead to their growth. But at the same time, it might trigger the risks to financial stability.

Nonetheless, the use of digital assets and the interest of consumers in them have increased simultaneously. Even though there has been a limited link between cryptocurrencies and the euro area banking sector, the increasing consumer interest has bothered the ECB. People from all over Europe are using trading services of cryptocurrencies, and the central bank eyes it as a potential threat to financial stability.

Moreover, organizations and firms are lending their support to cryptocurrency services. They are utilizing payment channels that support such transactions. Several retail networks are exploring different options in their ecosystems. They believe that digital currencies offer more ease and accessibility to customers and merchants. Not only this, Bitcoin and other assets have attracted support from asset managers and non-financial firms as well.

All of these developments hint toward the increasing scope of digital currencies and their rapidly growing usage in the European region. Many exchanges and service providers are eyeing Europe as a potentially strong market for digital currency. Therefore, they are scaling their operations in the region. On the contrary, the European Central Bank has repeatedly shown its resentment towards cryptocurrencies.

There is no doubt that the increasing correlation between crypto and stocks is a concerning phenomenon in the crypto space. It was for the first time since 2011 that Bitcoin experienced a bearish outlook for seven weeks straight. The clouds of uncertainty have still covered crypto amid rising global tensions and economic complications. However, it is yet to be seen how consumers and authorities respond to these developments.

Final Thoughts

The cryptocurrency market goes through several ups and downs. Global factors impact the performance of the market every now and then. Lately, the market is undergoing a challenging spell, as several tokens are constantly bleeding. The increasing global inflation is also having an impact on the digital asset industry.

Under these circumstances, investors and traders have tried to diversify their portfolios as a risk management strategy. They have distributed their investments in stocks and crypto to fetch positive results from both of these markets. However, this has not been the case as stocks and crypto have continued to fall in the past few weeks. Both of these markets witnessed a record seven-week-long bearish spell.

Muhammad Ali

Muhammad Ali

Muhammad Ali is an expert on crypto investments. Loving to write about fintech, he joins the team to provide detailed analyses of the hottest crypto news.

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