Welcome back to life, back to reality now that September is here and schedules are back to normal. After a couple weeks off, we are back too.
Bitcoin is in the news recently about whether it is a ‘safe haven’ asset like gold or not. Safe havens are places to invest or park your money when there is:
too much risk in the market
geopolitical risk or
other large global risks that you need to account for
For many years, gold (and sometimes silver) were the only places to do this.
For more practical reasons than gold, the safe haven in public investment markets has been US Government bonds. They are the investment returns we use when we calculate risk premium (premium over the risk-free rate) to determine if something is a good investment.
And what do we use to determine the risk-free interest rate? US Government Bonds.
But bonds are doing something weird all around the world….
Negative Rate Bonds Dominating Europe
According to the Financial Post, only Canada, the US, the UK, and Australia don’t have negative interest rates and there are currently $17 TRILLION dollars worth of bonds yielding a negative interest rate. 30% of all global bonds are negative yielding.
This is completely unknown territory for everyone.
Savers are getting killed, especially in the Eurozone where they are having to pay a bank to hold their money for them instead of earning a positive interest rate. This Financial Times article describes how these rates are supposed to slow down bank lending and could motivate individuals, banks and even insurers to hoard physical cash.
In short, it’s crazy. And even for a risk-free investment, US Government bonds are not immune from this environment of negative interest rates. Look at how low these rates are:
Not only are the rates low, but you can see the yield curve is inverted with 1-month paying more than every other term including the 30-year, which often is a leading indicator that a recession is coming. But even if a recession is months or years away, why would you buy a 30-year bond and lock your money away that long for 2.024% per year when you can keep renewing each month and do the 30-day for 2.055% and maintain 100% liquidity each month for other investment choices?
No one but sovereign funds, hedge funds, and other investment groups with so much cash to invest would opt for a 30-year bond.
So where should people invest if they want a ‘risk off’ option based on what they see in the world today?
Is Bitcoin really less risky than a US Gov’t Bond?
The short answer is No, but Bitcoin plus USD cash is.
No one, not even the most ardent Bitcoiner would say that Bitcoin carries less risk than a UST (US Treasuries). Bitcoin is a volatile asset. But what Bitcoin is not, and this is important, is that Bitcoin is NOT correlated to other investment assets.
For example, when the US economy goes into a recession, stocks suffer. This is no big secret. Yet, bonds usually do poorly too. US Dollars are generally taken out of the economy during a downturn so it’s hard to argue you should diversify only between stocks and bonds because both do badly if a recession is severe enough like the last one we had.
But thinking of Bitcoin as a ‘risk off’ asset or even a safe haven was the first thing I thought of when I saw this very interesting commentary from Plan B, who you may remember when we talked about Stock to Flow as a valuation method for Bitcoin:
So the premise here is that risk goes down but returns increase with just 1% in BTC or 2% in BTC with the remaining 98% or 99% just sitting in cash.
Even more astounding is this graph which outlines that a BTC+Cash portfolio outperformed the S&P 500 for the last 6 years and every 4 year period starting in 2010. Check it out.
This one is with a ‘slightly’ more aggressive allocation of 5% BTC and 95% sitting in Cash. The largest loss is lower (-5% to -6%) and risk overall is lower as well.
Why BTC+Cash is Lower Risk
A Yale University study found that optimal diversification for a portfolio including Bitcoin comes in at 6% Bitcoin. Even those not interested in cryptocurrency should have 4% of your portfolio in it. Institutions need to have at least 1% of their portfolio in this new asset class just for diversification purposes.
One of the most common risk measures is the Sharpe Ratio. The higher the Sharpe Ratio, the higher potential return available for the risk taken. The math looks like this:
And what’s risk free again? Government bonds…..
Messari measured Bitcoin’s Sharpe Ratio and it came in at 1.25, much higher than Gold’s 0.29, meaning the potential returns are higher in Bitcoin than gold. Bitcoin crushes all other assets. Bitcoin is the blue line.
And this is why you can hodl Bitcoin AND Cash together and still beat the market. Nothing is a promise of beating the market with less risk but having a 95% cash cushion makes it easy to sleep at night.
Are you long Bitcoin? And if you aren’t, would a combination of Bitcoin and Cash get you to try it?