Bitcoin Remains a Risk-On Asset

Bitcoin Remains a Risk-On Asset

Disclaimer: Your capital is at risk. This is not investment advice.

ByteTree Market Health Update; Issue 93

Some advocates are blind to the fact that bitcoin remains a risk-on asset, despite it being the blindingly obvious. Yet again, when the stockmarket sneezes, bitcoin catches a cold.

This latest selloff was triggered by the Evergrande debacle. The company has huge liabilities and massive exposure to global urban real estate, one of the many bubbles around us. It is the result of years of misallocated capital due to cheap credit.

This is precisely the sort of thing that bitcoin’s creator, Satoshi Nakamoto, and the cypher-punks feared and is the central reason for bitcoin’s creation.

I have a dream that one day bitcoin will cease to be a risk-on asset. If there was just one hint of resilience during a financial market shock, the price of bitcoin really would go to the moon. The world is crying out for a safe haven. No price is too high for an asset that can show resilience against carnage.

Bitcoin has indeed done well over the years, but the ugly truth is that it has done no better than the NASDAQ since the 2017 peak, which was nearly four years ago.

Bitcoin matches tech

Source: Bloomberg. Bitcoin relative to the NASDAQ since 2016.

After Monday’s fall, the NASDAQ is ever so slightly ahead. It’s a reminder that bitcoin’s outsized gains happened prior to the 2017 peak.

Against the established safe haven gold, bitcoin’s performance has been better, but not as much as perception would have you believe. In most people’s eyes, gold has “done nothing”, yet bitcoin is a mere 50% ahead of that. And if you took prices over the summer, the results were the same.

Bitcoin beats gold

Source: Bloomberg. Bitcoin relative to gold since 2016.

But in both cases, when you zoom out, it is clear how this latest bitcoin cycle has been fun, but only when you start from late 2018, when the price was $3,000 or March 2020, when it was $5,000. Frankly, and with all the $1m price targets, I think this bull market has been disappointing. It lacked the early build-up and jumped straight into a hype cycle the second it made a new high.

There is one big problem with the safe haven narrative: bitcoin’s continued high volatility.

There is much bullshit spoken in the bitcoin space, and one corker is that high risk leads to high return. It simply isn’t true. The almighty tech stocks, that have delivered fortunes to investors over the past decade have been remarkably calm.


Because their fundamentals were strong, with fast-growing profits, and every time they fell, investors bought the dip. Even gold, with no growth or profits, managed low volatility because there was always a buyer, whether it be a jeweller or a central bank.

Where is the value buyer?

Bitcoin lacks a value buyer, and that explains why its volatility is so high. If there was one, the dips wouldn’t be so painful. If investors were confident that other investors were buying the dips before they could, the dips would be shallow.

A safe haven doesn’t need to go up in a crisis. That is the job of portfolio hedges. It just has to fall less than the average. If the S&P falls by 10%, anything that falls by 5% or less is worthy of safe haven status.

The list of assets that meet that test would include high quality stocks, investment grade bonds and gold. The vast majority of assets would fail to meet that test, hence why the market indices were once named “the averages”.

I know we all believe we are above average at driving and love making, but only some of us can stake that claim. The resilient asset classes are few, and they are big and liquid. The rest of the market, by implication, is littered with mid to low quality stocks, commodities, junk bonds, and I hate to say it, crypto.

This could change, and bitcoin could join the upper ranks, but not without a value buyer. That is the biggest challenge. It will come with utility so that bitcoin is needed, not just wanted. When that happens, there will be no time for dips, and bitcoin will finally be able to call itself a high quality asset.