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Is bitcoin now a risk-on asset?

Is bitcoin now a risk-on asset?


TL;DR analysts suggest that traders sell bitcoin at times of economic uncertainty, just like they sell stocks, but that’s an argument that needs better nuancing than it currently receives.


Bitcoin used to be seen as an uncorrelated asset: a commodity that was independent of the mainstream financial world. The moniker of ‘digital gold’ was apt: in times of economic crisis of one form or another, bitcoin often saw a boost. Just as investors flock to gold when the stock markets are taking a beating, a handful saw bitcoin as a safe haven, of sorts – or, at least, as an alternative play when nothing else was generating returns.


With increasing mainstream and institutional interest, and the progressive financialisation of the space – think futures, and platforms designed for regular retail investors – that was bound to change somewhat. When the Dow Jones recently crashed, bitcoin nosedived the same day. The narrative was straightforward: in a risk-off environment in which traders seek lower-return but safer opportunities, they were as likely to sell crypto as they were stocks.


But one swallow does not a summer make, and one coincidence does not a correlation indicate. There undoubtedly has been some increase in the perception of bitcoin as a risk-on asset, but the days following the recent volatility on the global stock markets indicate it’s not as clear-cut as first it seemed. The Dow bounced; bitcoin didn’t. Bitcoin bounced; the Dow didn’t.


That shouldn’t come as much surprise, because global stocks and bitcoin are still very different animals. The reasons for demand for each are different. It’s quite possible to see, for example – as we have in the past – that certain types of economic pain would increase demand for bitcoin. Imposition of capital controls for major economies (China, 2015-) is one obvious example. Bail-ins for the banking sector, where the government takes money from account-holders and creditors instead of using taxpayers’ money (Cyprus, 2013), are another. Basically, if you think your money is going to be taken from you or controlled in ways you don’t like, bitcoin starts to look more attractive.


And then there’s the simple dynamic that bitcoin’s market cap ($100 billion) is tiny compared to the global stock markets (Dow Jones alone: ~$7 trillion), and it’s already collapsed by 65% over the course of this year. The Dow has only just come off its all-time high. While now technically in ‘correction’ mode, it has plenty further to fall if the mood music from the economy starts to sound more discordant.  


The bottom line, then, is that bitcoin is becoming more closely correlated to mainstream markets – if only due to the quantity of regular traders’ money coming in. But is by no means treated as a typical risk-off asset just yet. Whether it ever is treated as such will depend on the directions in which it evolves and its major use cases in the future.

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[…] Traders tend to react in the short term, so a surprise tomorrow will likely see an immediate move one way or another. For example, if the wider markets react to the results by selling dollars (perceiving a weakened US economy), dollar-denominated bitcoin holdings will be worth less (i.e. a $6,400 BTC is worth less in real terms than it was a day earlier). We might reasonably expect a sell-off as traders seek to cover other positions and increase their cash holdings. Meanwhile a result that points to a stronger economy might convince more traders to seek returns in a… Read more »


[…] way the mainstream markets go will likely have significant bearing on crypto. As we’ve argued, crypto may no longer be uncorrelated to the stock markets, but neither is it treated exactly the […]

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