- Bond-only investment portfolios can gain from the inclusion of risk-on assets like Bitcoin.
- The combination can help investors sail through the high inflation season.
Bitcoin Bond Combo
Mike McGlone, the Senior Commodity Strategist at Bloomberg Intelligence, feels that Bitcoin could be the savior for low-yielding bond portfolios. A combination he thinks will help investors tackle inflation well.
While enlightening his followers through his Twitter, Mr. McGlone explained how an ultra-low correlation between the two diametrically opposite assets results in a “Yin and Yang” relationship. And how this complementary combo outperforms strong growth-focused stock index like the Nasdaq 100.
Bonds are documented representations of loans that organizations issue to raise funds for their operation. These organizations can range from multinational corporations to government bodies like municipal offices and central banks. In the US, investors have the option to invest in US 10-Yr Government bonds, junk bonds (issued by corporations, etc.).
The statement made by the Bloomberg analyst sounds sensible, but how is it supposed to work out? Let’s see.
According to the consensus amongst investors, “safety” is the most primary reason cited for investment in bonds. They are less riskier than stocks and are therefore an excellent avenue for parking funds. Although, their safety implies that the returns too are considerably on the lesser side.
Joe Weisenthal co-host of the Bloomberg TV show, ‘What’d You Miss?’ puts it aptly.
Nonetheless, bonds are an excellent investment option, especially in situations of high inflation, as high inflation is a result of drop-dead interest rates and sky-high consumer and producer prices. With interest rates talking to the ground, as they currently are, bond prices go up. However, the recent Federal Reserve interest rate hike decisions have hurt bond yields. But over the last year, bond yields (on the 10-Yr Government bonds) have surged significantly, more than 100%.
Now here’s the thing with bond yields. Even if they have risen substantially, the returns earned from selling them in a high inflation market won’t add much value. Why? Because high inflation reduces the value of the underlying fiat currency, thereby hurting purchasing power of investors.
This is where Bitcoin comes in. Due to higher volatility, the benchmark cryptocurrency holds a higher risk profile than stocks. It correlates inversely to the US Dollar. BTC shoots up when the DXY (US Dollar strength against a basket of major fiat currencies) trends down. Also, Bitcoin by inherent design is a deflationary asset since it has a fixed supply of only 21 million coins.
High Returns, Low Risk
Bitcoin’s addition to strictly bond-only portfolio ups its returns quotient. Also, at the same time, BTC introduces an element of deflation that preserves and appreciates the value of the invested capital at a much higher rate. And since Mr. Mc Glone suggests a 10% addition, the risk of the overall Bitcoin-Bond portfolio remains controlled.