December 5, 2022

Portfolio Diversification May Be Affected by Crypto-Stock Market Similarities: ECB

The cryptocurrency market is experiencing a bearish cycle. However, the cryptocurrency space is onboarding individuals who plan to purchase digital assets to diversify their portfolios. Still, with the constant fluctuations in prices of cryptocurrencies, the crypto market experiences problems similar to that of stocks.

The Bearish Cycle and Portfolio Diversification

Recently, the European Central Bank has declared its mistrusts and skepticism amidst the decline in the cryptocurrency prices. They view the diversification of assets during this period as a risk similar to that of the stock market. The ECB stated that these similarities, which investors experienced between the fourth and second quarter of the cryptocurrency cycle, may have caused panic and FUD.

During their Financial Stability Review, they released a statement, “During periods of market stress, the increasing similarity of crypto-asset values with conventional volatile assets refutes their effectiveness for portfolio diversification.”

The cryptocurrency market is slowly becoming part of the conventional financial market, even if it claims to be decentralized. Even with its growing population of users, and use cases, experts keep refuting its disposition. Claiming that cryptocurrencies fail to serve their intended purpose as a decentralized figure. Their claims result from the evident correlation between crypto and the stock market during bearish seasons.

Amidst such claims, many stock market investors have added cryptocurrencies to their wallets since stocks are highly volatile. Some other investors have even sold off their portfolios to avoid getting liquidated. However, even the cryptocurrency market doesn’t have the capability to entice investors this season.

Increasing Ties With The Eurozone Banking Sector

It is well known that cryptocurrencies are very volatile, and if wrong moves are played, crypto could liquidate investors. The ECB has emphasized the above sentence to warn investors and financial institutions against increased participation. Although they have agreed that its volatility isn’t the reason for the slump in the stock market, the ECB still believes involvement with them might result in financial instability.

Currently, financial institutions in Europe have limited their interactions with Cryptocurrencies. But the ECB is still concerned by the growing usage, portfolios, and other activities involved with crypto assets. Irrespective of the ECB’s opinions, other major Eurozone fintech enterprises have integrated crypto services into their facilities. These companies plan on retailing these crypto services to their consumers and other merchants cheaper and faster.

Most financial technology firms seem to be interested in cryptocurrencies as well. Hedge funds, VCs, and other asset monitors have participated in the crypto market. Purchasing Bitcoin and other promising cryptocurrencies for portfolio diversification and long-term investments.