Crypto Is Growing Strongly In Asia, Especially In Vietnam, India, And Thailand

Cryptocurrency trading volume and movement in sync with the stock market are increasing sharply in Asia.

Few places in the world accept crypto as much as this continent. Among them, the top adopters are individual and institutional investors from Vietnam, India, and Thailand. This raises the critical question of the extent of digital assets integration into the financial system in Asia.

While digitalization can aid the transition to an eco-friendly payment system and also promote financial inclusion, digital assets are more likely to pose financial stability risks.

Before the pandemic, digital money seemed completely separate from the financial system. The proof is that Bitcoin and other assets do not have much correlation with the Asian stock market. This amplifies concerns about financial stability.

However, crypto trading skyrocketed as millions stayed home and received government aid, while low-interest rates and easy financial conditions also contributed to the boost.

The total market value in the world has grown 20-fold in just 1.5 years to $3 trillion by December 2021. It then fell below $1 trillion in June 2022 as the central bank raised interest rates to curb inflation, ending the opportunity for easy borrowing at low-interest rates.

While the financial sector is unlikely to experience similarly dramatic movements, it probably won’t be in a boom and bust cycle in the future. The contagion can spread through individual or institutional investors holding both crypto, traditional financial assets, or debt. Massive losses arising from cryptocurrencies force them to rebalance their portfolios, cause volatility in financial markets, or even default on traditional debts.

As Asian investors flock to cryptocurrencies, the correlation between the performance of stock markets in the region and coins like BTC and ETH spikes higher. Despite the low Bitcoin-Asian stock market returns and volatility correlation before the pandemic, the metrics are up significantly since 2020.

Bitcoin and the Indian stock market’s return correlation increased 10x post-pandemic, showing benefits from diversifying cryptocurrencies, and limiting risks. The 3-fold increase in volatility correlation reflects the spillover of risk sentiment between the crypto and equity markets.

There are many key drivers driving the strong connection between the crypto and stock markets in Asia, including the growing adoption of digital currency-related platforms and investment vehicles on the internet. Stock markets, OTC markets, or more generally institutional and retail investors in Asia are more accepting. Many of them have positions in both the stock and cryptocurrency markets.

Using the spillover methodology developed in the International Monetary Fund’s January Global Financial Stability Notes, it can be seen that the crypto-stock correlation in Asia increased with The spread of the investment portfolios volatility in Vietnam, India, and Thailand jumped. This represents an increasingly close relationship between the two asset classes, explaining the state of interdependence.

As such, authorities in Asia are increasingly sensitive to the risks posed by cryptocurrencies as acceptance continues to spread. Therefore, they focus on regulation, and multiple frameworks are being discussed in several countries such as Vietnam, India, and Thailand.

Considerable effort is also required to address significant data gaps that make it difficult for national and international regulators to fully understand the ownership and use of digital currencies and their use. overlap with the traditional financial sector.

Regulatory frameworks in Asia should be tailored to the primary use in the countries. They should establish clear guidelines for regulated financial institutions and seek to inform and protect retail investors. Finally, to be fully effective, regulation must be closely coordinated across jurisdictions.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Harold

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