Bond to Bitcoin Shift Predicted by Bloomberg Analyst

Bond to Bitcoin Shift Predicted by Bloomberg Analyst

The Shift Towards Bitcoin: A Renaissance in the Blockchain Industry

The global market dynamics are undergoing a major transformation, as financial asset volatility takes center stage. Bonds might be falling out of favor, while Bitcoin is solidifying its position as a hedge against debasement. This shift in dynamics has the potential to ignite a renaissance in traditional portfolio models. Bloomberg Intelligence analyst and Chartered Market Technician (CMT), Jamie Coutts, provides valuable insights into this evolving landscape.

Volatility Profiles: Bitcoin vs. Traditional Assets

Coutts highlights the changing volatility profiles of various assets, emphasizing the decline in Bitcoin’s volatility in recent years. According to his comparative analysis, Bitcoin and Gold have experienced a decrease in volatility since 2020, while most other assets have become more volatile.

To put this into perspective, Coutts refers to the volatility of the traditional 60/40 portfolio, which has increased by 90%. NASDAQ’s volatility rose by 53%, and global equity volatility saw a 33% increase. In stark contrast, Bitcoin’s volatility reduced by 52%, while Gold’s volatility dropped by 6%. These findings indicate a significant change in the risk characteristics of different assets.

Normalized volatility | Source: X @Jamie1Coutts

Moreover, Coutts highlights Bitcoin’s volatility trend. After a period of hyper-volatility from 2011 to 2014, Bitcoin’s volatility has been consistently decreasing. From its peak above 120 in early 2018, the metric now stands at 26.39. This decrease indicates a maturing market with potentially more stable returns.

Bitcoin volatility | Source: X @Jamie1Coutts

Despite the decreasing volatility, Coutts remains skeptical about Bitcoin’s short-term prospects due to the deteriorating macro environment. Factors such as the strengthening US dollar (DXY), rising 10-year Treasury yields, and an increasing global M2 money supply might pose challenges for Bitcoin and other risk assets.

Bitcoin’s Role in Asset Allocation

From an asset allocation perspective, Coutts explores whether Bitcoin can add value as a risk diversifier and improve risk-adjusted returns. Comparing the Sortino ratio during the last bear market, Bitcoin’s performance is not the best. In the 2022 bear market, Bitcoin’s Sortino ratio was -1.78, positioning it above global equities, the NASDAQ 100, and the traditional 60/40 portfolio. However, it trailed behind the S&P 500 (-1.46), European equities (-1.01), Gold (+0.1), Silver (+0.28), and commodities (+1.25) in terms of risk-adjusted returns.

Coutts acknowledges the cyclical behavior of Bitcoin and suggests that holding over the full cycle has been a winning strategy. Evaluating the Sortino ratio over the past three Bitcoin cycles (2013-2022), Bitcoin leads with a score of 2.46. It outperformed the NASDAQ 100 (+1.37), S&P 500 (+1.25), and global equities (+1.05). These findings support the notion that Bitcoin has the potential to improve risk-adjusted returns over the long term.

Bitcoin as a Hedge Against Debasement

As concerns about debasement rise, Bitcoin’s value proposition becomes even more significant. Coutts emphasizes that traditional bonds might not be the place to preserve wealth in the face of monetary debasement. Instead, he identifies Bitcoin as the top choice for portfolio reallocation in such circumstances.

Coutts compares the asset returns concerning money supply growth (M2) over the past decade. The results clearly demonstrate Bitcoin’s dominance, with a staggering ratio of +8,598. In contrast, NASDAQ had a ratio of +109, S&P 500 +25, and global equities -7.5. These figures highlight Bitcoin’s potential to protect against the erosion of value caused by excessive money printing.

Bitcoin risk-adjusted returns over multiple cycles | Source: X @Jamie1Coutts

In conclusion, Coutts postulates that in the years to come, portfolio allocators might begin to shift towards better debasement hedges. Bitcoin, with its unique characteristics and proven track record, emerges as an obvious choice. Coutts even suggests that Bitcoin could secure at least a 1% allocation in the traditional 60/40 portfolio. As the blockchain industry continues to evolve, Bitcoin’s place as a reliable and robust investment option seems more solidified than ever.

At the time of writing, Bitcoin traded at $26,433.

BTC hovers below the trend line, 1-day chart | Source: BTCUSD on TradingView.com