Jamie Coutts, a crypto market analyst at Bloomberg Intelligence, recently took to social media platform X to discuss the future of market volatility and the evolving role of Bitcoin in global asset allocation. Coutts began by noting that he expects to see a significant increase in volatility across all markets, citing the current trends in yields, the U.S. dollar, and global M2 money supply.
Volatility Profiles Have Changed
According to Coutts, there has been a noticeable change in the volatility profiles of global assets compared to Bitcoin in recent years. He pointed out that since 2020, hard assets like Bitcoin and Gold are the only assets that have seen a decline in their volatility profiles. Specifically, global fixed income assets have seen a 53% increase in volatility, global equities have increased by 33%, while Bitcoin and Gold have decreased by 52% and 16%, respectively.
Bitcoin’s Trending Volatility
Coutts further elaborated that if one were to exclude Bitcoin’s hyper-volatile early years (2011-2014), the cryptocurrency’s volatility has been on a slight downward trend since 2017. He believes this is noteworthy, especially when considering the macroeconomic factors at play.
Macroeconomic Factors and Bitcoin
Coutts warned that given the rising U.S. dollar and 10-year Treasury Yields, along with a declining global M2 money supply, it’s challenging to see how Bitcoin and other risk assets can maintain their current positions. He specifically noted that he inverted the U.S. dollar and yields to better visualize their correlation with Bitcoin’s performance.
Bitcoin as a Risk Diversifier
Despite the short-term outlook, Coutts argued that what truly matters from an asset allocation standpoint is whether Bitcoin can serve as a risk diversifier and improve risk-adjusted returns. He cited that Bitcoin’s risk-adjusted returns (measured using the Sortino ratio) have shown significant improvement during the last two bear markets. He also mentioned that 2018 Bitcoin ranked at the bottom, but by 2022, it had outperformed fixed income and some equity markets on a risk-adjusted basis.
The Challenge of Bitcoin’s Short History
Coutts acknowledged that Bitcoin’s relatively short history makes it difficult to draw long-term inferences. However, he stated that holding Bitcoin through multiple cycles has proven to be a winning strategy.
Future Asset Allocation
Coutts suggested that in the years ahead, asset allocators might shift towards better hedges against monetary debasement, identifying Bitcoin as an obvious choice for this role. He argued that bonds are not ideal for outpacing monetary debasement, especially when considering various money aggregates like the U.S. M2 money supply.
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