The US, China, and Bitcoin

This post was originally published on May 30, 2019, and sent to Messari Pro subscribers.

For many years, people have speculated about the fate of Bitcoin during the next financial crisis. Will Bitcoin ($BTC) behave like digital gold and emerge as a sought-after safe haven? Or will it crash alongside other risky asset classes like equities? No one really knows the answer for sure. And anyone who claims otherwise probably doesn’t really know anything.

But if you asked Ray Dalio, CEO of the largest macro fund in the world, “when is the next recession?”, he would say something like “55% probability that it will happen within the next two years”. In macroeconomics, there is a notion of “risk-on / risk-off” trades. Sometimes, investors will have a higher risk appetite than others. During the 2008 financial crisis, investors reduced risk by moving their stock and real estate exposure to less risky instruments such as US treasuries and gold. This was a so-called risk-off environment. From 2009 until the present, we have gotten to a state that is progressively more risk-on.

A lot of folks in crypto showcase this behavior as well. Many seem to think that Bitcoin is a risk-on asset, meaning investors will reduce their exposure to Bitcoin during risky times, thereby crashing the price of Bitcoin.

But the key realization here is that risk-on / risk-off is not binary, it’s a spectrum. For instance, both USD and long-term government bonds are generally considered risk-off, but dollar deposits are still less risky than long-term government bonds. Both equities and corporate bonds are generally considered risk-on, but equities are still more risky than corporate bonds. Where an asset is located on that spectrum can evolve over time. For instance, the USD became more risk-off as it became the de-facto global reserve currency.

Where has Bitcoin evolved on the risk-on risk-off spectrum?