Risks to financial stability have not yet been driven by sell-offs in the cryptocurrency market, the International Monetary Fund (IMF) has stressed, despite the collapse of the terraUSD stablecoin in May.
In its latest World Economic Outlook, the IMF said on Tuesday the “dramatic sell-off” in crypto investment vehicles and subsequent failure of hedge funds has “so far” been limited to the digital assets space only.
“Spillovers to the broader financial system have been limited so far,” the IMF said, despite highlighting recent losses incurred by crypto investors following the collapse of stablecoin terraUSD in May.
At the time, stablecoin terraUSD, a coin pegged to a fiat currency, broke from its $1 peg. The stablecoin was backed by bitcoin reserves held by its sister company Luna. As the price of bitcoin fell, $4.2bn of short positions wiped $29bn from the terraUSD ecosystem.
Despite the IMF's conviction that crypto lacks any real threat to financial systems, the crypto market contracted on Tuesday evening, shaving $17bn from its $1tn market cap recorded last week.
This outlook comes a day before the Federal Reserve is expected to undertake the sharpest rise in interest rates in over 20 years with a 75 basis points (bps) hike currently priced in by markets.
According to on-chain analytics from data company Glassnode, net transfer volume to and from exchanges surged on Monday. However, a day before the Federal Open Market Committee's (FOMC) meeting, a surge in outflows marked a trend reversal indicating that investors are moving funds to exchanges to sell on the news of the impending interest rate hike.
“Crypto deposits increasing at exchanges generally signaled holders’ intent to sell or swap assets in the hopes of repurchasing at a lower entry point,” Grayscale research analyst Matt Maximo said.
This short-term buy-and-sell scenario was played out two weeks ago as the US CPI numbers were unveiled on 13 July. The CPI indicated a 9.1% year-on-year increase, 0.3 percentage points above the Dow Jones estimate.
In the run-up to the FOMC meeting, bitcoin ETPs experienced a trend reversal. According to data from 21Shares, bitcoin ETPs saw $7.3m inflows last week, up from the $1.4m outflows seen at the start of July.
“Investors are acting cautious and want to have the fingers at the trigger to act in case there are any major surprises in the results this week”, 21Shares told ETF Stream.
This “trigger” readiness echoes analysis from CoinShares which indicates inflows into digital asset funds totaled $30m last week, up from $12m the week prior.
According to James Butterfill, head of research at CoinShares, investors are betting on a "policy error”. He believes that despite the Federal Reserve's impending rate hike to combat the highest level of inflation since the 1980s, the macro-economic outlook is “better” than expected.