New Evidence on Spillovers Between Crypto Assets and Financial Markets

Abstract

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Do cryptocurrency investors in the UK need more protection?

“…In contrast with the modern portfolio theory's advocacy of diversification, my study suggests that UK cryptocurrency owners often lack a balanced portfolio, indicating that cryptocurrencies might not fit well with diversified ones (Iyer, 2022;Klein et al, 2018;Smales, 2019). This observation could support the random walk theory, which argues against predicting future prices based on past trends.…”

“…Researchers such as Cosi c and Casni (2019) argue that cryptocurrencies can enhance portfolio efficiency, while others highlight the challenges for digital currency portfolio selection as a result of their volatility and skewness (Aljinovi c et al, 2021;Bowala and Singh, 2022). The role of cryptocurrencies as hedging tools is also debated: some studies indicate a low correlation with traditional assets and potential portfolio diversification benefits (Andrianto and Diputra, 2017;Tan et al, 2023;Youssef et al, 2023); meanwhile, others note increasing correlations, especially during turbulent periods like the COVID-19 pandemic (Iyer, 2022;Klein et al, 2018;Smales, 2019). These conflicting insights underline the complexities of integrating cryptocurrencies into investment portfolios and underscore the need for further research to understand their full implications for retail investors.…”