Cryptocurrencies are no longer an obscure asset class in the financial ecosystem, but the growing correlation with the stock market has weakened Bitcoin’s “investment hedge” role (bitcoin) and other cryptocurrencies, according to new Research by the International Monetary Fund (IMF).

a blog post accompanying The survey highlights new risks associated with the growing interconnectedness between virtual assets and financial markets. The article, written by Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department, along with economist Tara Iyer and Deputy Director of Research Mahvash S. Qureshi, claimed that the increasing correlation between cryptoassets and stocks “limits their perceived risk diversification. Yields and heightened risk contagion across financial markets.”

“Crypto-assets like Bitcoin have evolved from an obscure asset class with few users to an integral part of the digital asset revolution,” the article reads, adding that the shift has been accompanied by financial stability concerns.

No BTC and Ether (Ethereum) was rarely correlated with major stock indexes prior to the pandemic, and the authors agree that cryptoassets help investors spread their risk by hedging against volatility in other asset classes. “But things changed following the extraordinary central bank response to the crisis in early 2020,” the article wrote, adding that cryptocurrencies and stocks went hand in hand as investors’ risk appetite grew.

The correlation coefficient between BTC and the S&P 500 jumped 3,600% to 0.36 from 0.01 after April 2020. That means the two asset classes have moved more closely together since the coronavirus pandemic.

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Experts at the International Monetary Fund say that the stronger the correlation, the greater the risk to Bitcoin. The growing interconnectedness between cryptocurrencies and stock markets will allow the spread of shocks that could destabilize financial markets. Noting that cryptoassets are no longer on the fringes of the financial system, the authors concluded:

“Given their relatively high volatility and valuations, their increased co-movement could soon pose a risk to financial stability, especially in countries with widespread cryptocurrency adoption.”

The experts further called for a coordinated global regulatory framework “to guide national regulation and mitigate financial stability risks from the crypto ecosystem.”

last month, IMF Chief Economist Gita Gopinath A similar call was made for a global policy on encryption. She believes that if countries were to ban cryptocurrencies, they would have no control over offshore exchanges that are not subject to their own regulations.