Risk On-Risk Off: Where’s the Market and How to Seize the Opportunity

By Nicolas Abington | Crescent City Capital Market Analyst Intern

Risk on-risk off is a common way of evaluating investor’s risk aversion levels by analyzing risk sentiment. Risk sentiment can be analyzed by asset prices, corporate earnings, macroeconomic data, and central bank action. Risk sentiment describes how investors perceive their worst-case scenario for any given trade and what asset classes they invest in as a result. For example, if the market were to be in a risk-on environment, investors would focus their attention on stocks as they feel the overall risk of the market is low and they can receive a higher return from stocks.

That seems to be the case right now as every other day the S&P 500 or the Nasdaq reaching new highs. While that is overall good for stockholders, how would this sentiment affect the asset pricing for cryptocurrency investments? 

There needs to be a determination on whether or not cryptocurrency thrives in a risk-on (stocks) or risk-off environment (gold/bonds). As I’ve written previously, there is a strong inverse correlation between stocks performance and cryptocurrency asset pricing. There is also a strong correlation between gold and Bitcoin from past trades. Overall this signals that Bitcoin and other cryptocurrencies by association thrive in a risk-off market. 

This might be hard to swallow as cryptocurrencies are typically one of the most volatile asset classes on the market, but volatility doesn’t necessarily dictate risk. According to an analysis conducted by Plan B, the risk to reward for Bitcoin has skyrocketed much further than other risk-off assets. The risk associated with Bitcoin carries a much higher return making it a risk-off asset, even with the volatility associated with it

All being said, this is just another idea to be considered when analyzing the cryptocurrency market. As time advances towards the halvening and other major events occur throughout 2020, it’s most important to constantly be adjusting our thought processes to stay in tune with the market.