Module 10: Stablecoins and Macro
Risk-On, Risk-Off, and Correlations
Chapter 10 of 12 · about 5 minutes
10.1 Digital gold or tech stock?
Node held both a technology stock fund and some bitcoin. One month, the tech fund fell 8%. Bitcoin fell 20%.
"I bought bitcoin partly to diversify," said Node. "But it fell with my tech stocks, only harder."
"That's been a common experience," said Hash. "Bitcoin is often called digital gold. In practice, during many stressful periods, it's behaved more like a high-risk technology stock. But not always. Understanding correlations helps you know what you actually own."
10.2 Risk-on and risk-off
Markets often move between two broad moods.
| Mood | What investors do | What tends to rise | What tends to fall |
|---|---|---|---|
| Risk-on | Seek higher returns, take more risk | Stocks, especially growth stocks; crypto; high-yield bonds | Safe havens |
| Risk-off | Seek safety, reduce risk | Government bonds, often the US dollar, often gold | Stocks, crypto, high-yield bonds |
Macro events, like surprise inflation data (Chapter 3), central bank decisions (Chapter 2), geopolitical shocks, and financial crises, often trigger shifts between these moods.
10.3 What correlation means
Correlation measures how closely two assets move together, on a scale from −1 to +1.
| Correlation | Meaning |
|---|---|
| +1 | Move together perfectly |
| +0.5 | Tend to move together, loosely |
| 0 | No consistent relationship |
| −0.5 | Tend to move in opposite directions, loosely |
| −1 | Move in exactly opposite directions |
Correlation is usually measured over a rolling period, such as 30 or 90 days, and it changes over time.
10.4 Correlation isn't the same as size of move
Two assets can be highly correlated but move by very different amounts. Beta describes how much one asset tends to move relative to another.
| Example | |
|---|---|
| Technology stock index moves | −2% |
| Bitcoin, with an illustrative beta of 2.5 | Tends to move about −5% |
Node's experience fits this pattern: Bitcoin moved in the same direction as tech stocks, but with a larger beta. Smaller crypto tokens typically have an even higher beta relative to Bitcoin (Module 4, Chapter 6).
10.5 How Bitcoin's correlations have changed
| Period | Common pattern (simplified) |
|---|---|
| Early years | Little correlation with traditional assets; crypto-specific drivers dominated |
| From around 2020 | Correlation with stocks, especially technology, rose significantly, particularly during stress |
| Recent years | Correlation has varied: sometimes high with stocks, sometimes lower, with periods of independent movement |
Correlation with gold has generally been lower and less stable than supporters of the digital gold idea might expect.
10.6 Correlations spike in crises
In severe market stress, correlations between risky assets often jump toward +1. Investors sell whatever they can to raise cash or cover losses, regardless of what the asset is.
In March 2020, as the pandemic spread, stocks, gold, and Bitcoin all fell sharply at the same time. Bitcoin lost roughly half its value within about a day before recovering in the months that followed (Chapter 4).
This matters for diversification. Assets that seem uncorrelated in normal times may all fall together exactly when you most need diversification.
10.7 When Bitcoin decoupled
There have also been notable periods when Bitcoin moved differently from traditional risk assets.
In March 2023, when several US banks failed and the banking sector came under pressure, bank stocks fell sharply. Bitcoin, after an initial dip tied to the USDC depeg (Chapter 7), rose strongly over the following weeks. Some saw this as evidence of Bitcoin acting as a hedge against banking system stress, which fits the reason it was created (Module 1, Chapter 1). Others pointed to expectations that the crisis would push central banks to ease policy, which would favour risk assets generally.
"So in a banking crisis, Bitcoin acted a bit like digital gold," said Mint. "But in a general panic, it acted like a tech stock."
"That's one reasonable reading," said Hash. "The type of crisis may matter. When the problem is trust in banks or currencies, Bitcoin's original purpose comes into play. When the problem is a general rush for cash, Bitcoin is just another risky asset to sell."
10.8 The digital gold versus risk asset debate
| Digital gold view | Risk asset view |
|---|---|
| Fixed supply, like gold, protects against currency debasement | Behaves like high-beta technology stocks during most stress periods |
| Long-term returns have far outpaced inflation | Highly sensitive to interest rates and liquidity |
| Rose during the 2023 banking stress | Fell sharply in 2022 when inflation was highest |
| Increasingly held by institutions as a reserve asset | Driven by speculative flows and leverage |
Both views have evidence. Bitcoin's behaviour may also be changing as its holder base shifts toward longer-term institutions, ETFs, and treasuries (Chapter 8). It's possible that Bitcoin acts like a risk asset in the short term and more like a store of value over long periods.
10.9 What this means for your portfolio
- Don't assume crypto diversifies stock risk in a crash. It often hasn't.
- Size crypto positions for high beta. A small allocation can have a large effect on overall portfolio swings.
- Watch macro mood indicators: stock indices, bond yields, and the dollar (Chapter 5), alongside crypto data.
- Expect correlations to change. Measure them over recent periods rather than relying on old assumptions.
10.10 Try it yourself
Using a free charting or correlation tool, find the 90-day rolling correlation between Bitcoin and a major technology stock index, and between Bitcoin and gold, over the past three years. Note when each was highest and lowest. Then compare Bitcoin's percentage move with the stock index's on the five largest down days for the stock index in the past year.
Key takeaways from this chapter
- Markets shift between risk-on moods, favouring stocks and crypto, and risk-off moods, favouring safe havens.
- Correlation measures how closely assets move together; beta measures how much one moves relative to another.
- Bitcoin's correlation with stocks, especially technology, rose from around 2020, with a high beta.
- In severe crises, correlations between risky assets spike, reducing diversification when it's needed most.
- Bitcoin has sometimes decoupled, as during the 2023 banking stress, possibly depending on the type of crisis.
- The digital gold and risk asset views both have evidence; Bitcoin's behaviour may be evolving.
- Size crypto for high beta, watch macro mood indicators, and measure correlations over recent periods.