In a comprehensive assessment of global market dynamics, Bloomberg Intelligence analyst and Chartered Market Technician (CMT) Jamie Coutts has weighed in on the shifting sands of financial asset volatility. With bonds potentially falling out of favor and bitcoin cementing its place as a downgrade hedge, traditional portfolio models may be on the verge of a renaissance.
cuts tweeted, “It looks like we are about to see a substantial pick-up in volatility across all markets, considering where yields, the dollar, and global M2 are headed. Despite what lies ahead, there has been a big shift in the volatility profiles of global assets versus bitcoin in recent years.”
A comparative analysis by Coutts highlighted that since 2020, the volatility profiles of bitcoin and Gold have decreased, while most other assets have seen an increase in volatility.
Their breakdown indicates that traditional 60/40 portfolio volatility increased by 90%, NASDAQ volatility increased by 53%, and global equity volatility increased by 33%; Meanwhile, only bitcoin volatility decreased by 52% and Gold volatility, which decreased by 6%.
Normalized volatility | Source: X @Jamie1Coutts
Coutts further explained that after bitcoin‘s “hypervolatile” phase during 2011-14, the cryptocurrency’s volatility has been on a downward trajectory. From a peak above 120 in early 2018, this metric currently sits at 26.39.
However, Coutts remains skeptical about bitcoin‘s near-term prospects given the deteriorating macro environment: “With btc volatility near the bottom of the range plus a deteriorating macro environment – the US dollar (DXY) has risen , the 10-year Treasury yield has risen, M2 money supply has increased. It is difficult to see how btc (and all risk assets) can withstand this setup.”
On the positive side, from an asset allocation perspective, Coutts sees the real question as whether “bitcoin can add value as a risk diversifier and improve risk-adjusted returns.” Comparing risk-adjusted returns using the Sortino index during the last bear market, bitcoin‘s performance is not the best.
In the 2022 bear market, bitcoin‘s Sortino Index is -1.78, positioning btc above global stocks, the NASDAQ 100, and the traditional 60:40 portfolio. However, it lags the S&P 500 (-1.46), European equities (-1.01), gold (+0.1), silver (+0.28) and commodities (+ 1.25).
Sortino Asset Ratios | Source: X @Jamie1Coutts
Elaborating on bitcoin‘s cyclical behavior, Coutts added: “The problem with btc is that its relatively short history makes inferences difficult and one-year periods are certainly not meaningful. The best we can do is multiple cycles. It is clear that maintaining the full cycle has been a winning strategy.”
Evaluating the Sortino Index over the last three bitcoin cycles (2013-2022), Coutts found that bitcoin was leading with a score of 2.46, outperforming the NASDAQ 100 (+1.37), the S&P 500 (+1, 25) and global stocks (+1.05). .
In this scenario, downgrade concerns further enhance bitcoin‘s proposition. Coutts emphasized this saying: “And if allocators want to overcome monetary debasement, in most time frames, bonds are not the place to be.” He identified bitcoin as the primary option for portfolio reallocation against monetary debasement.
Citing the vast difference between asset returns relative to money supply (M2) growth over the past 10 years, he highlighted bitcoin‘s dominance with a staggering ratio of +8,598, followed by NASDAQ (+109), S&P 500 (+25) and global stocks (-7.5).
In a final statement, Coutts posited: “In the coming years it is conceivable that allocators will begin to shift toward better degradation coverages. btc is an obvious choice.” Furthermore, he suggests that bitcoin could supplant bonds by securing at least 1% of the traditional 60/40 portfolio.
At the time of publication, btc was trading at $26,433.
