The Cryptocurrency Market and the Financial Stability

Abstract The fast development of the cryptocurrencies has brought to the attention of the authorities and researchers the importance of studying the risks associated with this category of assets. One of the main directions of analysis was the study of the correlations between the crypto-market and other traditional markets in order to assess the impact on financial stability. In the last 2-3 years, more and more studies have showed increasing correlations between the traditional markets and the crypto-market, which could generate some risks to the financial stability. We applied a novel methodology, based on TVP-VAR model, to study the correlations between Bitcoin and three other traditional assets, respectively gold, S&P 500 and EUR/USD from 01/01/2015 to 01/01/2023. We proved that the correlations between traditional assets, such as equity (S&P 500), respectively commodity (gold) and Bitcoin have increased significantly. However, other assets, such as the exchange rates are not correlated with cryptocurrencies and the correlations in the other way, from Bitcoin to gold, respectively S&P 500 are still very low. Thus, our findings indicate that, at this moment, the crypto-market poses risks to the financial stability, but because of the fact that the correlations are still only unidirectional (from traditional assets to cryptocurrency), the crypto-market could now just amplify the risks to the financial stability originating from the traditional markets.