What is protecting an investment portfolio from potential stock market volatility? As per Bloomberg Intelligence’s Mike McGlone, a merged exposure of Bitcoin (BTC), gold, and government bonds.
The senior commodity strategist, who sees BTC heading to $100,000, pitted derivatives in a new report representing the three safe-haven assets against the performance of the S&P 500 index, finding that the trio has been outperforming the benchmark Wall Street index at least since the start of 2020.
Bitcoin-Gold-Bonds performance against the S&P 500 index. Source: Bloomberg Intelligence
The Bitcoin-Gold-Bonds index took data from the Grayscale Bitcoin Trust (GBTC), SPDR Gold Shares (GLD) and iShares 20+ T- Bond ETF (TLT). The three funds enable investors to gain exposure in the market without requiring to hold/own the physical asset.
Bitcoin more profitable than gold and bonds
McGlone noted that Bitcoin did some heavy lifting in making investors’ risk-off strategy successful, adding that their portfolios “appear increasingly naked” without the flagship cryptocurrency even if they remain exposed to gold and bonds.
The statement took cues from the performance of Bitcoin, gold, and the 10-year US Treasury yield against the prospect of rising quantitative easing and debt-to-GDP levels. Since March 2020, Bitcoin has risen almost 1,190%, which comes to be extensively better than spot gold’s 25.93% spike.
BTC/USD weekly price chart. Source: TradingView.com
Meanwhile, the U.S. 10-year bond yield has jumped from its record low of 0.33% to 1.326% in the same period.
However, despite a healthy spike, the returns on the benchmark government bond have come to be lower than the core U.S. inflation of 5.4%, suggesting that investors who hold bonds as safety against risky equities are making an inflation-adjusted loss.
US consumer price inflation rose to 5.4% in July. Source: Forex Live
As a result, lower yields have created avenues for corporates to borrow at meager rates for expansion, thus giving equities a boost. Additionally, investors in the secondary markets have started moving their capital into non-yielding assets like Bitcoin and gold, anticipating higher payouts.
Yield rebound ahead?
Former bond investor Bill Gross, who built Pimco into a $2 trillion asset management firm, noted that bond yields have “nowhere to go but up.”
The retired fund manager said that the 10-year U.S. Treasury note yields would rise to 2% over the next 12 months. Therefore, bond prices will fall due to their inverse correlation with yields, resulting in a loss of about 3% for investors who bought debts all across 2020 and 2021.
Federal Reserve purchased 60% of net US government debt issuance over the past year with its $120 billion a month asset purchase program to boost the US economy. However, in August, the U.S. central bank announced that it would slow down its bond-buying by the end of this year, given the prospects of its 2% inflation rate target and economic growth.
“How willing, therefore, will private markets be to absorb this future 60 per cent in mid-2022 and beyond,” questioned Gross, adding that the US bond market would turn into an “investment garbage.”
“Intermediate to long-term bond funds are in that trash receptacle for sure.”
Rising rates could threaten to draw capital out of overvalued U.S. stocks. At the same time, as a risk-off trade, funds could also start flowing into the Bitcoin market. Julian Emanuel, the chief equity and derivatives strategist at brokerage firm BTIG, shed light on the same in his interview with CNBC in February. Excerpts:
“This is the environment where that catch-up trade is going to show its ability […] You’re coming from such a low absolute level of rates that higher rates actually is likely to be supportive for alternatives like Bitcoin.”
Related: 3 reasons why a Bitcoin ETF approval will be a game changer for BTC price
To McGlone, the capital inflow into Bitcoin and the rest of the cryptocurrency market, including Ethereum, would be about finding the next-best investment opportunity. He said that digital assets may represent the “higher-beta potential,” adding:
“We see Ethereum on course toward $5,000 and $100,000 for Bitcoin.”
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