Yes, Virginia, Bitcoin is a Risk Asset

In 1897, a young girl named Virginia O’Hanlon wrote to the New York Sun with a simple but profound question: “Is there a Santa Claus?” The editorial board responded with what would become one of the most famous lines in American journalism: “Yes, Virginia, there is a Santa Claus.” It was not an affirmation of literal truth, but rather a defense of belief, the idea that some myths endure because people want and need them to be real.

I understand the summer just ended and the holiday season is months away, but when I go to Maine for long stretches and then come back, my creative juices flow. This paper was triggered by a conversation with Sam Callahan this morning. Sam co-authored a paper with Lyn Alden that I have referenced in the past on fiscal dominance. At the end of our conversation, we talked about Bitcoin and its struggles this year. At one point, he mentioned the view by many that it is still just another risk asset. For some reason, my brain held onto that, and two hours later, we have this paper. People may want to think it is an uncorrelated asset, but the truth is less romantic and more empirical: Yes, Virginia, Bitcoin is a risk asset.

Let’s get this out of the way. I have been very wrong about Bitcoin so far in 2025. Heading into the year, I believed the conditions were ripe for it to at least double. I expected an incredible list of tailwinds to unfold—and for the most part, they have. The U.S. government, for the first time, has signaled a measure of support, not just tolerating Bitcoin but acknowledging it as part of the financial landscape. More and more corporations have announced treasury allocations, following the path set by pioneers like MicroStrategy and Tesla. The pipeline of crypto-related IPOs has been buzzing with excitement, giving public-market investors fresh avenues for exposure. Regulatory pressure, which once loomed like a dark cloud, has eased as lawmakers shift toward accommodation rather than restriction. Even the banking system, long resistant, has been pushed into the role of distributor, offering Bitcoin access directly to clients. And beneath it all, stablecoins have created unprecedented on-ramps and liquidity, driving volumes higher and making the digital economy feel more “real” than ever before.

Despite being right about the tailwinds and in many cases watching them unfold exactly as I anticipated, Bitcoin has still lagged my expectations in 2025. Traditional fiat investors and institutions have become more involved and more vocal on the bullish side of crypto. The infrastructure is stronger, the adoption signals are clear, and the barriers to entry for mainstream capital are falling. And yet, the price response has been muted. I have theories. One is that there remains an overhang from the crypto crash of 2022 and the regulatory crackdowns that followed, similar to the post-dot-com bubble period for tech stocks. For many investors, the financial scars and regulatory PTSD of that period have not fully healed, and caution still overrides enthusiasm. Another possibility is that Ethereum has drawn attention away from Bitcoin. The Circle IPO in particular gave traditional investors a “fundamentals-first” narrative, a growth story tied to stablecoins and blockchain infrastructure, that feels more tangible than Bitcoin’s store-of-value framing. At the same time, global capital has choices, and the rally in Chinese equities this year may have siphoned off demand from China, the largest contributor to global M2, through local speculative appetite that otherwise would have flowed into Bitcoin. Whatever the reason, I have been wrong so far. And being wrong, especially in the face of conditions that seemed so favorable, forces me to step back and ask harder questions about what Bitcoin truly is and how it behaves. If the fundamentals and the narratives line up, but the price refuses to follow, then perhaps the answer lies not in the tailwinds but in the nature of the asset itself.

If there is one body of work that has consistently cut through the noise on Bitcoin’s behavior, it is a second piece of research by Sam Callahan and Lyn Alden. She has argued, with data to back it up, that Bitcoin is the most sensitive asset in the world to global liquidity conditions. While gold, equities, and even long-duration bonds respond to liquidity cycles, Bitcoin responds with a kind of leverage—amplifying the upswing when liquidity expands and suffering disproportionately when liquidity contracts. The mechanism is straightforward. Bitcoin does not generate cash flows, and it has no intrinsic demand outside of speculative and limited collateral use. Its price is therefore a pure reflection of marginal capital flows. When the Federal Reserve and other central banks are expanding balance sheets, cutting rates, or otherwise providing dollar liquidity, Bitcoin soars. When liquidity tightens—through quantitative tightening, higher real yields, or a stronger dollar—Bitcoin falls. Alden has often described it as the “highest-beta liquidity barometer” in the market.

The data bear this out. During the COVID liquidity surge of 2020–2021, Bitcoin outperformed nearly every other asset, rising from under $10,000 to nearly $70,000 as M2 growth and global QE flooded markets. When liquidity reversed in 2022, Bitcoin collapsed harder than equities, falling more than 70 percent peak to trough. Even in 2023–2024, rallies in Bitcoin aligned tightly with pauses in Fed tightening and with periods of rising reverse repo balances, while corrections matched drains in global dollar liquidity. In this sense, Bitcoin is less an idiosyncratic hedge and more a levered expression of the liquidity cycle itself. That is the definition of a risk asset. It is not uncorrelated; it is hyper-correlated to the very driver that powers speculative flows. Its long-term story may be about digital gold, hard money, or financial sovereignty. But its short-term reality is that it trades in rhythm with the S&P 500, the Nasdaq, and dollar liquidity indicators. As Alden has noted, this is both a curse and a blessing. It explains why Bitcoin has struggled to perform in certain macro environments, but it also explains why, in moments of aggressive monetary easing, it has the capacity to outperform everything else.

And that brings us to an important comparison. Bitcoin, according to their research, is the most correlated asset to liquidity, and in second place is the SPX. But as most of us know, the drivers of that SPX result during the time of Bitcoin’s rise have been the so-called “Magnificent Seven”, Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and NVIDIA. These companies now dominate the index to such an extent that its behavior is largely their behavior. In practice, when we speak about the SPX as liquidity-sensitive, we are really speaking about the Mag 7. Bitcoin and the Mag 7 are thus tied together by the same underlying current. They are both risk assets that move with liquidity, but they do so in different registers: the Mag 7 as dominant incumbents in technology, and Bitcoin as the outsider asset amplifying every pulse of the cycle.

Yet 2025 has added a wrinkle. Not only have the Mag 7 underperformed Bitcoin again this year, despite large earnings growth relative to the rest of the SPX, the Mag 7 are currently unchanged for the year relative to the SPX. The relative performance for any year over the last decade, except for 2022, has never been negative. I believe investors who once clung to them as the only growth game in town have started rotating elsewhere, in fears that their spending race to win AI, not only against each other but also against China, is making them vulnerable to the future realities of AI disruption. I believe this view is correct and will continue.

Here is the thing about being called a risk asset: as an investor, you care not only about being one today but also about remaining one tomorrow. At one point in history, AOL was a quintessential risk asset. So were Cisco and Intel, the darlings of the dot-com boom. Ford and GM were once the ultimate risk assets of the industrial age, rising and falling with business cycles. Exxon and Chevron held that position in the energy economy, their fortunes tied to oil shocks and global growth. General Electric, once considered the bellwether of American innovation, was also a risk asset—a company that investors believed could do no wrong until the tides shifted. Risk assets come and go, their importance fading as the currents of innovation and capital move elsewhere.

That is why, when someone says Bitcoin is “just a risk asset,” they are, like Virginia in 1897, admitting more belief than dismissal. To call it a risk asset is to acknowledge its place in the cycle, to concede that it matters enough to respond to liquidity, speculation, and flows like all risk assets. It is not outside the market, but at the very center of it. In a strange way, the very act of classifying it as a risk asset affirms its legitimacy.

And here is where I take my stand. Ten years from now, after AI has transformed the economy, most of today’s risk assets will have cycled through, replaced by new champions. The Mag 7 will fracture under the never-ending advancements in AI and the democratization and demonetization it carries with it for all innovations and ideas. The next cohort of technology leaders may not yet exist. Ford and GM, Exxon and Chevron, and even GE all remind us that dominance in one era rarely guarantees permanence in the next. But I believe that the one risk asset that will endure, the one that will still matter in 2035 as it does today, is Bitcoin, because it is a belief and not an idea. Like Santa Claus in the imagination of a child, its presence will be undeniable only in this case, grounded not in myth but in the hard proof of survival. Yes, Virginia, Bitcoin is a risk asset. And it may be the only one from our era that lasts.