Risk-on/Risk-off Assets — What are they?
In these volatile times, it is important to understand the concept of Risk-On/Risk-Off assets and how it impacts the cryptocurrency markets.
Not all financial assets carry the same Risk. Investors tend to change asset classes depending on the perceived risk in the markets. Global economy and news have a big impact on the allocation decision in an asset or another one. Investors look at macroeconomic indicators and information to assess their appetite for risk.
Risk-on assets are most likely to be chosen when markets have an optimistic economic outlook, central banks policies are favourable (low inflation), corporates earnings are growing, geopolitical news are rather positive. In other words, Risk-on assets are speculative assets that investors choose once they have extra money to spend.
Risk-off assets are then the opposite… When everything goes to red, people will rebalance their investment into the safest assets where they are sure not to lose any money to be able to face potential upcoming difficult times.
Needless to say crypto is on the Risk-on side. Including it, the asset classification from Risk-off to Risk-on would look like this:
Risk-off > Cash & Cash equivalent > Gold > Bonds > Real Estate > Equity > Emerging Markets > Alternative Investment > Futures and Derivatives > Cryptocurrency > NFTs > Risk-on
Ukraine, High Inflation, Rates Increase, Regulations talks, are currently pushing investors towards Risk-off assets. Risk-on assets are being sold and transferred to safe places.
Risk-Off periods are the favourite of some investors gaining wider exposure to riskier markets at lower prices… (not financial advice).
It is all about your risk aversion, what you can afford losing, information and timing. A good trader knows what are its limits, sets its entry/exit points and strategy!
Risk-on environments are often carried by a combination of expanding corporate earnings, optimistic economic outlook, accommodative central bank policies, and speculation. We can also assume that an increase in the stock market is a sign that risk is on. As investors feel the market is being supported by strong influential fundamentals, they perceive less risk about the market and its outlook.
Conversely, risk-off environments can be caused by widespread corporate earnings downgrades, contracting or slowing economic data, uncertain central bank policy, a rush to safe investments, and other factors. Just like the stock market rises relating to a risk on environment, a drop in the stock market levels equals a risk off environment. That is because investors want to avoid risk and are averse to it.
With cryptocurrency gaining some of its value back since mid-July, are we assisting to a shift from Risk-off to Risk-on ?
I personally believe we are not out of the woods yet but some strong metrics show that market sentiment might be at an inflection point.
The end of 2022 will most certainly be very exciting!
Thank you for reading!
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Risk-on/Risk-off Assets — What are they? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.