Bitcoin is one of the most important financial innovations of the last decade. However, a strong use case and cyclical correlation for it hasn’t been established with strong evidence yet. Some believe Bitcoin to be a risk-on asset, as it thrived during the longest bull market. Others believe Bitcoin is a risk-off asset as it provides an exit from the traditional financial system.
Not everything is binary. Some things can be some of this and some of that. The most rational stance on Bitcoin right now is that of uncertainty, as there is no evidence of anything yet. Despite this, there are a few signs that simply cannot be ignored.
Bitcoin has had a strong correlation with gold off late. This is a result of poor macroeconomic conditions globally. Over the long term, Bitcoin initially had a strong correlation with gold, but this was curbed during the 2016/17 recovery and bull run.
What makes all of this more interesting is the way Bitcoin reacts to global catastrophe. In the aftermath of tensions escalating between Iran and the USA, Bitcoin price action actually did well. The same goes for various crises, from the inversion of a yield curve to trade tensions between the USA and China.
As of now, the Coronavirus is the latest disaster that has struck the world, and the Bitcoin price has surged nearly 42 percent since the start of 2020.
One particular bit of information stands out: Bitcoin does well when the economy is booming but uncertainty is looming. Now, the US economy is by no means in a recession, and the stock market was booming before Coronavirus fears took over. In 2018 January, Bitcoin started to fall as serious structural issues showed up, threatening to plunge the economy into a recession. But a trade war, which would only pull down trade volumes and not create havoc for anybody, was seen as a positive by the Bitcoin market.
Bitcoin can be described as a bull market asset that serves as a hedge against economic uncertainty, but it is not yet a complete alternative to the financial system. Even if people see it as one, we won’t know until a structural recession hits the global economy and forces Bitcoin to reveal its moves.
This is why Bitcoin is probably a mix of risk-on and risk-off. It establishes precedents from both types of assets.
But to call it this or that at this point is ignorant. Why? Because we need to see how it acts during bad times before classifying it as anything.
Maximalists believe Bitcoin will be inherently bullish during recessions. Unfortunately, we do not know this and they are simply playing guessing games with an asset they are emotionally invested in.
Let the next cycle of BTC price action play out, and watch how it reacts to structural issues with the global economy. We may not have a recession today, tomorrow, or even next year, but it will come, and what Bitcoin does will set is classification in stone.