Bitcoin: Risk-On or Risk-Off?
Bitcoin has several proponents sitting in both camps that suggest it is an entirely risk-on asset or a risk-off asset. Comparing Bitcoin’s price trends to traditional risk-on and risk-off assets can help determine if there is any difference.
Bitcoin: Pure speculation or future-proofing financial security?
Like many financial instruments, it is almost impossible to separate political and ideological views from their price moves. But Bitcoin is an entirely different instrument. As an asset (and it is a bonafide asset now), it is almost singular in the reasons for its existence. Bitcoin came in response to the Great Recession – an answer to the ability of centralized powers having power and influence over money. Bitcoin is attached to ideology due to its origins. Bitcoin’s inception formed a decentralized form of value that is separate from, and free from, a centralized authority. But anything that becomes anything of value will draw in those who want to capitalize on that thing of value because they believe it will rise in value: investors and speculators.
Quick rundown here:
Risk-on means that investors are willing to put their money into something that they believe will rise in value. Risk-on means risking your capital in hopes of a higher return. In general, risk-on takes on a widespread belief that the aggregate participants are positive about the health of the economy and financial situation. Things that influence risk-on behavior are stable geopolitical environments, positive economic reports, low unemployment, and a general ‘good mood’ by the masses. The most traditional risk-on example is the stock market.
Risk-off means that investors are worried about future growth. It is also referenced as flight to safety. They are concerned about economic contraction or inflation. Risk-off is a condition where investors are uncertain about the future; they fear the future financial health of the economy. In some regions of the world, people may become displaced due to war, famine, and general instability. Things that influence risk-off behavior are rising interest rates, inflated currency valuations, and political strife. Fear is the mood in a risk-off environment. The most traditional and historical example of a risk-off asset is gold.
So is Bitcoin a risk-off or risk-on asset? Let’s look.
Bitcoin compared to the S&P 500 (SPY ETF)
I’m on board with what experts say: Bitcoin follows the stock market more than it does gold. Bitcoin follows the speculation side of things pretty heavily.
Bitcoin compared to Gold (XAUUSD)
Does Bitcoin follow Gold? Sure – but Gold also follows the stock market quite a bit as well. Gold just broke out of a 6-year range so there is going to naturally be some massive speculation and breakout trading/traders involved. Gold moves along with the stock market more often than you think. It is still considered a non-correlated instrument to the stock market, but it does follow stocks a surprising amount of the time.
Bitcoin compared to Both
And here’s a look at Gold and the S&P500. 2019 is an excellent example of a year where you saw risk-on and risk-off assets all experiencing some strong bullish moves. Ultimately though, the answer to whether Bitcoin is a risk-on or risk-off asset is simple: its both. From the investor and trader perspective, it is an entirely speculative instrument. Bitcoin has not existed long enough or provided enough evidence-based (although evidence does exist, even currently) conditions that prove it is a flight to safety. For those who believe in the dangers of centralized powers being able to confiscate or devalue the fruit of your labors, Bitcoin is risk-off. For those people in nations where the elite corrupt the currency to worthlessness, Bitcoin is a risk-off asset. For those who must flee oppression and can’t haul their physical goods with them, Bitcoin is a flight to safety, it is a risk-off asset. For anyone who believes in Liberty, Bitcoin is a risk-off asset.