Bitcoin…but not only – In general, we are used to studying the course of Bitcoin long, wide and across. But if the study of the price of Bitcoin is very important to identify bullish or bearish dynamics in the cryptocurrency market, it is just as interesting to look at what is happening outside the cryptocurrency market. To do this, we go to the stock market, to less risky assets, etc. We try to understand the market as a whole because Bitcoin and cryptocurrencies are part of this global financial system.
Risk on, risk-off : what category does Bitcoin belong to?
There are two types of assets: assets risk on (risky assets) and assets risk-off (safe haven assets):
- The risks on: they are assets volatile, of which the risk is considered as raised. In this category we find the stock market (Apple, Microsoft, Intel etc.), indices (SP500, Nasdaq, Cac 40 etc.), oil, and cryptocurrencies (Bitcoin, Ethereum, etc.). These assets can boost the return of a portfolio. It is advisable to allocate a small percentage of your portfolio in this type of asset to limit the risk.
- The risk offs: they are assets low volatility, the risk of which is considered low. We are talking here about precious metals (gold), bonds, currencies (dollar, yen, Swiss franc).
Before discussing the place of Bitcoin, it is necessary to understand why these two categories are important. An institution is not going to do all in in a sector. The goal of a portfolio manager will be to allocate a percentage in different sectors in order to have an interesting return. He can’t afford to take too much risk, but he has to take enough to keep his clients trusting him.
You must know that capital sails within the financial markets. Money does not disappear, it circulates. If players are confident, they will tend to expose themselves more heavily to risk-on assets. In times of fear and uncertainty, players will move towards assets that offer less return but more security.
Any self-respecting cryptocurrency enthusiast knows that Bitcoin has a limited amount of tokens and its intrinsic characteristics are close to those of gold. However, Bitcoin and cryptocurrencies are not (yet?) considered as such by financial market players:
The chart above allows you to compare the performance of different assets since 2018. Note that the Bitcoin acts differently from risk off assets. When Bitcoin drops from early 2018 to 2020, the gold and dollar index (DXY) rises. When Bitcoin bullruns, Gold and DXY go down. In summary, we cannot say that it is considered a risk off by the players. Ray Dalio, investment fund manager says:
“Investing up to 2% in Bitcoin is reasonable” Ray Dalio.
We see through this statement that Bitcoin is beginning to be taken seriously by financial market professionals but that it remains risky to allocate a high percentage of the portfolio to it.
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Stocks and pairs to watch for the trend of Bitcoin and altcoins
We have just seen it, cryptocurrencies are considered assets risk on by institutions. It is therefore interesting to compare it to risk off assets. Compare thegold (GOLD) and the bitcoin (BTC) provides trend information. A strong uptrend in cryptocurrencies is marked by a declining GOLD/BTC pair.
Today, bitcoin is tradable by Wall Street professionals in different ways (ETF, Grayscale, etc.). As we know, cryptocurrencies are dependent on the stock market. It is interesting to look at certain stocks to understand if institutional players are geared towards the cryptocurrency market.
Since Coinbase’s April 2021 IPO, the stock has fallen and appears to have found support at $210-220. At the same time, since April 2021, bitcoin has been in range between $65,000 and $30,000 without taking a clear direction.
There are other actions that deserve attention. We can mention Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT), two companies specializing in mining. Let’s look at the similarities between MARA and BTC:
We see that the correlation is very strong between the two assets . In May 2021, MARA had scored a local top slightly earlier than bitcoin. For the moment, the action Marathon Digital Holdings seems neglected by professionals. It will be interesting to see the evolution of this to know the intentions of institutions in the future. The SP 500 (index of the 500 largest American companies) and the NASDAQ (index of American technology stocks) are also important to monitor. A healthy bullish trend shows that the players are oriented towards risk on.
Understanding what is happening around the cryptocurrency market means understanding if the trend is geared towards risky assets. Thanks to these tools, we put the odds on our side when taking a position, whether in investment or for trading. We must not forget that cryptocurrencies are part of the global financial landscape and that as such, we must observe what is happening in the traditional markets. Gold is also an asset to watch for the overall bitcoin trend.
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