Risk-on and risk-off
What does it mean when markets rise or fall together on shifts in appetite for risk?
In plain words
Risk-on and risk-off describe periods when investors broadly increase or reduce their willingness to hold assets that can lose value. In risk-on, many markets rise together; in risk-off, they fall together, and money moves towards safer holdings.
Why it matters
When assets move together, holding several of them offers less protection than expected, because a single shift in appetite can hit the whole portfolio at once. Measuring how closely two markets track each other shows how much diversification is actually available.
In a real week: BTC, week of 14 August 2023
In the week of 14 August 2023, BTC and ETH moved in the same direction, with a very close hourly correlation of 0.94. BTC fell 10.63%, closing at 26189.99, while ETH held up slightly better, outperforming by 2.18 percentage points and shifting the ETH-BTC ratio by 2.44%. BTC's weekly return sat in the 11th percentile against 287 weeks of history, with volume above its prior 12-week average. The two crypto assets largely fell as one, though this covers only two crypto assets, not a full market.
A common mistake
Reading a strong BTC-ETH correlation as proof of a market-wide risk-off move. Two crypto assets tracking each other may reflect conditions inside crypto rather than a broad shift across markets.