Trading Crypto In 2022 – Risk-On Or Risk-Off?
Last Updated on 16 May 2022 by CryptoTips.eu
Bitcoin, crypto and tech stocks have fallen double digit percentages from their all-time-high. Although you mostly only hear about a ‘crypto crash’ in the MSM, it is clear this is a tech crash as well. Peloton has lost 91% since it’s ATH, Zoom 83%, Paypal 74%, just like Netflix.
Extreme pain is concentrated in high multiple tech stocks, but there's damage all over the place.
— Michael Batnick (@michaelbatnick) May 14, 2022
JP Morgan -31%
Starbucks -40%
Disney -47% pic.twitter.com/FoF9NJiole
To see what to do, we have to zoom out and check the history books.
Whatever it takes
Saving the Euro at any cost, those were the words of former ECB President (and current Italian Prime Minister) Mario Draghi. Back in 2012, during a speech, he outlined that even though the Eurozone was in a deep financial crisis because of the Southern European countries and the Greek crisis, his department would do whatever it takes. Draghi stated:
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
The markets understood that Draghi was not kidding and crept back up.
My expectation?
— Michaël van de Poppe (@CryptoMichNL) May 11, 2022
The inflation rate will be 8.1% or less, which would mean that it's decreasing since last month (that number was 8.5%) and as a result, the FED is going to slow down the strategy.
Risk-on assets including #Bitcoin will rally from there.
In March of 2020, Federal Reserve President Jay Powell saw the onslaught on global markets when investors realized that the Covid infections would not remain in China only. With the first cases emerging in northern Italy, panic swept global investor sentiment and stock markets collapsed. So did crypto markets in fact and Bitcoin legendarily lost 50% in a single day.
Correlation with traditional markets
However, Powell copied Draghi’s move and promised to support stock markets, buying up bonds and printing dollars.
Ever since March 2020 and the covid-19 crisis, financial markets have thus continued to benefit from what can only be described as accommodative policies from central banks (the Fed, the ECB, the Bank of England and the Bank of Japan).
Also since then, cryptocurrency markets experience a much greater correlation with traditional markets. Taking the latter into account must be paramount to your investment and trading logic in the current market.
The big question that we should ask is: are we in a risk-on or a risk-off environment?
In a “Risk-On” market, investors will favor the stock market, indices, high-yield bonds, commodities, but also cryptocurrencies. The logic is simple: financial market risks are low as the central banks keep bailing them out, so market participants are willing to take on more risk in order to earn higher returns. The “Risk-On” mode is therefore, in the current environment, the modus that favors cryptocurrencies.
In a “Risk-Off” market, market participants will favor solid assets to the detriment of risky assets. This mode comes into play during periods of uncertainty or fear for the financial markets. Reasons can be various, geopolitical conflicts, end of an era of accommodating monetary policy or systemic risk (the collapse of financial institutions like Lehman Brothers or real estate behemoths like Evergrande).
If you therefore conclude that the current environment is risk-off rather than risk-on, you best diversify and spread your risk until cooler minds prevail.
freedomtumz / Depositphotos.com
