Bitcoin Says It’s Time to Go “Risk-Off”VIEW IN BROWSER By Jeff Clark, Editor, Market Minute Bitcoin says it’s time to go “risk-off.” The King of Cryptocurrencies traded as high as $87,000 on Monday. It dipped near $82,000 yesterday. That’s almost a 6% drop in just three days. And, it’s significant. You see, bitcoin is the epitome of a “risk-on” asset. It’s speculative. Folks buy it when they’re looking to juice the returns on their portfolios. They often leverage their trades. And, that usually happens only when investors are focusing only on the potential reward while they ignore the risks. That is a “risk-on” environment. When bitcoin is falling, though, it’s a “risk-off” sign. Folks are getting conservative. They’re paring back investments, tightening stop-losses, and paying of margin. That’s when investors are more focused on reducing risk than on maximizing return. This week’s decline in bitcoin suggests we are entering a risk-off phase. Look at this chart… 
The red arrows on the chart point to short-term peaks in the price of bitcoin. That’s when the environment shifts from risk-on to risk off. The blue arrows point to short-term bottoms – when the environment goes from risk-off to risk on. Now look at this chart of the S&P 500… 
The blue arrows – when bitcoin bottomed – line up with bottoms in the broad stock market. The red arrows, on the other hand, occurred about two weeks before the stock market topped.
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This tells us two things… First off, the shift from risk-off to risk-on tends to happen across asset classes at the same time. More important for today’s essay, though, is when the environment shifts from risk-on to risk-off, bitcoin is the canary in the coal mine. And, right now, the canary is coughing. Over the past several weeks, investors have been in risk-on mode. They’ve been selling their cheap, lagging, value stocks and plowing the money into the few momentum-fueled names that have kept the indexes propped up for so long. But, if the warning from bitcoin is accurate, those momentum-fueled stocks are on borrowed time. And, the “rotation” situation we looked at last week is about to play out. Best regards and good trading, 
Jeff Clark
Editor, Market Minute |
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