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The European Central Bank (ECB) warned that the high correlation between the cryptocurrency and stock markets will no longer allow diversifying the investment portfolio with digital assets.
The ECB issued a statement saying that the strengthening of 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 frequent sales in December 2021 and May 2022.
The regulator states that the correlation of markets is a common practice during difficult economic situations. Cryptocurrency markets in such periods often showed dynamics similar to the dynamics of quotations in stock markets. The ECB said that now cryptocurrencies are not the best way to hedge risks:
“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 in times of instability in the traditional asset market. As cryptocurrency is increasingly correlated with traditional assets during periods of uncertainty.
The ECB suggests that crypto investors consider investing in less risky assets. Many investors who specialize in the stock market have added cryptocurrency to their portfolios. As investments in stocks and bonds have suffered from a wide-ranging fall, the ECB states, 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 historic highs. Therefore, he left the stock market for crypto assets.
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