The Shifting Sands of Financial Asset Volatility
Bloomberg Intelligence analyst and Chartered Market Technician (CMT) Jamie Coutts has provided a comprehensive evaluation of global market dynamics, particularly focusing on the changing landscape of financial asset volatility. According to Coutts, bonds may no longer be as attractive while Bitcoin solidifies its position as a hedge against debasement. As a result, traditional portfolio models could be on the brink of a renaissance.
Major Portfolio Shift Towards Bitcoin?
Coutts took to Twitter to share his insights, stating that an increase in volatility across all markets is imminent due to the direction of yields, the US dollar, and global M2. He also highlighted a significant shift in the volatility profiles of global assets compared to Bitcoin over the past few years.
A comparative analysis by Coutts revealed that Bitcoin and Gold have experienced a decline in volatility since 2020, while other assets have become more volatile. For instance, the volatility of traditional 60/40 portfolios has increased by 90%, NASDAQ’s volatility has surged by 53%, and global equity volatility has risen by 33%. In contrast, Bitcoin’s volatility decreased by 52% and Gold’s volatility decreased by 6%.
Coutts further explained that after a highly volatile period from 2011 to 2014, Bitcoin’s volatility has been on a downward trend. Its volatility metric dropped from a peak of over 120 in early 2018 to the current level of 26.39.
However, Coutts expressed skepticism about Bitcoin’s short-term prospects due to the deteriorating macro environment. With factors such as an increasing US dollar (DXY), rising 10-year Treasury yields, and growing global M2 money supply, it may be challenging for Bitcoin and other risk assets to withstand these conditions.
BTC Vs. Global Asset Classes
From an asset allocation perspective, Coutts believes the key question is whether Bitcoin can diversify risks and improve risk-adjusted returns. When comparing risk-adjusted returns using the Sortino ratio during the last bear market in 2022, Bitcoin’s performance was not the best.
In the 2022 bear market, Bitcoin had a Sortino ratio of -1.78, positioning it above global equities, the NASDAQ 100, and the traditional 60/40 portfolio. However, it trailed behind other assets such as the S&P 500 (-1.46), European equities (-1.01), Gold (+0.1), Silver (+0.28), and commodities (+1.25).
Coutts also discussed the cyclical nature of Bitcoin and noted that its relatively short history makes it difficult to draw definitive conclusions from one-year periods. However, analyzing multiple cycles reveals that holding Bitcoin over the full cycle has been a winning strategy.
In his evaluation of the Sortino ratio across three Bitcoin cycles from 2013 to 2022, Coutts found that Bitcoin outperformed the NASDAQ 100, S&P 500, and global equities with a score of 2.46.
BTC: Top Bet Against Money Printing
Coutts emphasized that concerns about debasement further strengthen Bitcoin’s proposition. He pointed out that bonds are not a favorable option for outpacing monetary debasement and identified Bitcoin as the top choice for portfolio reallocation in response to this issue.
Highlighting the stark difference in asset returns relative to money supply growth (M2) over the past decade, Coutts highlighted Bitcoin’s dominance with a ratio of +8,598. This was followed by NASDAQ (+109), S&P 500 (+25), and global equities (-7.5).
Hot Take: Bitcoin’s Potential to Replace Bonds
In conclusion, Coutts suggests that as allocators seek better hedges against debasement in the years ahead, Bitcoin could see a shift in its favor. He even proposes that Bitcoin could potentially secure at least 1% of the traditional 60/40 portfolio, potentially supplanting bonds in the process.
At the time of writing, BTC was trading at $26,433.
By
By
By
By
By