Bitcoin: risk-on or risk-off?

Last week we saw an “unexpected” movement from Bitcoin when the equities markets sharply dropped. As Bitcoin had already shown signs of being a risk-off asset it means we would expect investors to seek refuge in it in times of uncertainty and a stock market crash fits that definition. However, we saw Bitcoin drop alongside the equities market, why is that?

Let’s start with the correlation with the most popular risk-off asset: Gold.

[caption id="attachment_14255" align="aligncenter" width="2506"] Source: Coinmetrics[/caption]

As can be seen by the previous chart, the correlation between gold and Bitcoin has remained relatively stable with no sharp downturns. That can be explained by the fact that even gold dropped sharply alongside equities.

The reason for that “unexpected” move is due to the steepness of the crash. Upon further inspection, it became clear that the high selling volume stemmed from the futures market which means that investors had to sell all they could to get cash on hand and prevent their equities positions from being liquidated and losing a big portion of their capital. That same movement occurred at the beginning of the 2008 crash as well.

Hence, if the definition of a risk-off asset is determined by gold, Bitcoin has not “betrayed” it or deviated from it. Even as the Federal Reserve announced the interest rate cuts that created some relief in the equities market, both gold and Bitcoin had a small rally alongside stocks.

Although these characteristics between gold and Bitcoin are being shared at the moment, Bitcoin is still finding its macro-placement in the financial markets. That current definition of Bitcoin being a risk-off asset may soon change.

In an ideal situation, we’d like to see Bitcoin and crypto as an asset class become uncorrelated. That means they move according to their own dynamics and far from what other asset classes are doing (not very probable in a connected economy). This would create a new place for it in a traditional investment portfolio and can lower the risk the latter is exposed to.

Bitcoin’s current correlation to gold is not very positive because as it serves the same purpose in a portfolio at the moment, and investment managers would likely choose gold over it. Once cryptocurrencies as a whole find their ultimate stance in financial markets, as they continue to mature, they will likely have their own allocation, serve a different purpose and de-risk portfolios.

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