October 13, 2014 3:31 PM

Bitcoin and Market Turmoil: IMF Report Warns of Shocks and Volatility

In a special report published today, the International Monetary Funds warns policy makers to prepare for investment outflows – and possible “runs” – amidst increased risks of fund asset sell-offs induced by the ending of quantitative easing. The report anticipates market volatility and low liquidity in the shadow banking system, with concern for the emerging market economies to which many mutual funds are heavily exposed. Geopolitical risk is alluded to but not discussed in the three part report.

IMF Report: Risks of Derailment

Six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies to support demand, encourage corporate investment, and facilitate balance sheet repair.

The extended period of monetary accommodation and the accompanying search for yield are leading to credit mispricing and asset price pressures, increasing the chance that financial stability risks could derail the recovery.
– IMF Global Financial Stability Report

The International Monetary Fund’s Global Financial Stability Report, released today, warns of increased liquidity risks and volatility in global markets.

The report expresses the IMF’s opinion that “the global economic recovery is expected to proceed slowly,” and that the, so-called, “recovery” should be supported by “ongoing monetary accommodation in advanced economies”.

Search for Yield

The IMF notes that extended quantitative easing and low interest rates have driven investors and funds to search for higher yield with accompanying higher risk.

Source: IMF Global Financial Stability Report

Emerging Markets Bias

Consequently, the shadow banking system, especially mutual funds, have portfolios that are heavily weighted with emerging market stocks and bond investments. The report argues that the exit from quantitative easing could develop a negative feedback loop between investor outflows and asset performance, with the outcome that global market volatility will ramp up.

Source: IMF Global Financial Stability Report

The assets, remember, are heavily weighted with emerging market equities and bonds, so a sell-off of these assets will have a greater impact in the emerging markets than elsewhere. The geopolitical risks of such a turn of events is hinted at but not discussed. In the context one can only imagine that the IMF is possibly implying – in the worst case scenario – the rapid onset of adverse economic conditions in affected emerging markets, including panic, labor unrest and shock recession.

Effect on the Bitcoin Price

The effect of market-wide volatility on the Bitcoin price is difficult to predict. Since global market volatility has been low for most of Bitcoin’s price history, we lack a precedent and clear chart examples. Volatility in combination with funds fleeing mutual funds/equities and seeking alternatives such as safe havens or other high-yielding assets, could see investment inflow to Bitcoin – the larger the amounts, the more pronounced the effects on the price chart. Such volatility would have the effect of creating large Bitcoin price advances, followed by rapid and deep corrections due to profit-taking and the triggering of large sell-orders.

The following BitFinex price chart (late 2013 until present) shows the effect of volatility on price. Periods of low volatility precede periods of high volatility and the largest price moves occur during periods of high volatility. During volatile periods the price moves are not confined to a single direction – notice the large price swings (both up and down) during the rally to the all-time high of 30 November 2013:

The market-wide volatility that the IMF warning refers to is of greater magnitude than anything represented in the above Bitcoin chart. The global economy has endured the past five years in a state of relatively low volatility due to depressed market conditions. We will have to wait to see if the conditions and vectors that the IMF is anticipating will materialize. If they do – and given our expectation that some of the funds fleeing from equities and emerging markets may flow into Bitcoin – then be prepared for a Bitcoin price surprise.

Also read: Bitcoin Price Analysis and IMF Markets Warning


Charts from the IMF.
Bitcoin price chart from TradingView.
Images from the IMF and Shutterstock.

Venzen Khaosan @venzen

Market analyst and Open source developer with a keen interest in blockchain technology, consensus mechanisms and the decentralizing effect. He has found a solution to the PKI mechanism. Email me to discuss.

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