Bitcoin Portfolio Allocation Rising! with Lyn Alden
Summary
TLDRThe discussion revolves around the evolution of Bitcoin's perception and its potential allocation in investment portfolios. It highlights the shift from Bitcoin being an emerging asset to a more mature and utility form of money. The conversation also touches on the bond market's historical performance and recent challenges, including the risks associated with negative yields and the potential for a market regime change that could affect bond prices and their traditional role as a defensive asset.
Takeaways
- 🔄 Bitcoin's perception and allocation in portfolios may increase as it matures and becomes more established.
- 🚀 Over the past decade, Bitcoin has evolved from an emerging asset to a more recognized form of money.
- 📈 The traditional 60/40 portfolio, which includes a large bond allocation, may not be as effective due to changes in the bond market.
- 💸 The bond market has seen a 40-year trend of declining interest rates and rising bond prices, which has provided a stable income with low volatility.
- 📉 The bond market entered a bubble phase with yields reaching near 0% and even negative in some cases, leading to a lack of return on investment.
- 💔 The inflation wave and modest yield increases have eroded the purchasing power and value of bonds.
- 🔄 There is a slow realignment happening in the bond market, but many investors have not yet adjusted their expectations.
- ⬇️ The risks in the bond market are now skewed to the downside, unlike the past where they were considered a safe investment.
- 🔄 The market has not fully adjusted to the changing dynamics, as evidenced by the bond sell-off in 2022 despite a decelerating economy.
- 🤔 Investors may need to reconsider their bond allocations in light of these changes and the potential for future market shifts.
Q & A
How has the perception of Bitcoin evolved over the past decade?
-Ten years ago, Bitcoin was seen as a less clear and more emerging asset. As it has survived major cycles and matured, its future has become clearer, and its allocation in portfolios may increase accordingly.
What is the potential change in Bitcoin's role as it matures?
-Bitcoin may transition from an emergent asset to a utility money, becoming a stable form of currency that is widely accepted and used.
How does the 6040 portfolio relate to the discussion on asset allocation?
-The 6040 portfolio, which traditionally allocates 60% to stocks and 40% to bonds, is mentioned as an example of how allocations might need to be reevaluated, especially considering the changing dynamics of the bond market.
What was the state of the bond market in 2016-2019?
-During this period, the bond market experienced a significant bubble, with yields dropping to near 0% in some countries and even negative yields in others, leading to a situation where investors faced risk without the possibility of return.
How did the inflation wave impact bond investments?
-The inflation wave that followed the low-yield period wiped out the purchasing power of bonds, and even a modest increase in yields severely damaged their prices and purchasing power.
What is the current risk for bond investors due to changing market conditions?
-The risks for bond investors are skewed to the downside due to the potential for inflation, higher yields, and fiscal dominance, which could lead to poor performance in years ahead.
Why did the bond market perform poorly in 2022 despite a decelerating economy?
-In 2022, bonds sold off along with a decelerating economy, which is unusual because bonds typically perform well in such environments. This indicates that the market has not adjusted to the changing market regime.
What is the implication of the bond market's past performance on future investment strategies?
-Investors need to reevaluate their strategies as the bond market's past performance, characterized by 40 years of declining yields and rising bond prices, may not be sustainable in the future.
How might portfolios need to adjust to reflect the new realities of the bond market?
-Portfolio models may need to adjust by reducing the bond allocation, which has traditionally been seen as a defensive asset, to account for the increased risks and potential for lower returns.
What is the significance of the tweet mentioned regarding birds in the street in the context of the bond market?
-The tweet serves as a metaphor for the unusual and potentially unsustainable conditions in the bond market, highlighting the need for investors to be aware of the changing landscape.
What does the discussion on the bond market suggest about the importance of portfolio diversification?
-The discussion emphasizes the importance of diversification, as relying heavily on bonds, which have been a traditional safe haven, may not be as prudent given the current and potential future market conditions.
Outlines
📈 Evolution of Bitcoin Expectations and Allocation
The speaker discusses how the perception and allocation of Bitcoin have evolved over time. Ten years ago, Bitcoin was seen as an emerging asset with unclear expectations. With each market cycle, Bitcoin has become more established, leading to a gradual increase in its allocation in portfolios. The speaker suggests that as Bitcoin matures, its role may transition from an emergent asset to a utility form of money, which could further justify a higher allocation in investment portfolios.
💹 The Changing Landscape of the Bond Market
The conversation shifts to the bond market, which has historically provided low volatility and decent returns over the past 40 years. However, the speaker points out that the market entered a bubble in recent years, with yields dropping to near-zero or negative levels. This situation has reversed, with the inflation wave eroding the purchasing power of bonds. The speaker notes that the bond market is now experiencing a slow realignment, but many investors and portfolio models have not yet adjusted to the new market regime, which could lead to risks in the future.
Mindmap
Keywords
💡Allocation
💡Bitcoin
💡6040 Portfolio
💡Bond Market
💡Yield
💡Inflation
💡Fiscal Dominance
💡Volatility
💡Defensive Asset
💡Market Regime
Highlights
Bitcoin's changing role and allocation in portfolios over time.
Expectations of Bitcoin were less clear in the past.
Bitcoin's resilience and growth through cycles lead to increased allocation.
Bitcoin's transition from an emerging asset to a more mature utility money.
The 6040 portfolio and its relevance in the current market.
The bond market's performance over the past 40 years.
The bond market bubble and its subsequent risks.
The existence of negative-yielding bonds and their implications.
The impact of inflation on bond purchasing power.
The potential for a realignment in investor thinking about bonds.
The risks of bonds in the face of inflation, higher yields, and fiscal dominance.
The traditional view of bonds as a defensive asset and its challenges.
The bond market's performance in 2022 and its deviation from historical trends.
The market's adjustment to the changing market regime and its implications for bonds.
Transcripts
I also think that every cycle that goes
by the kind of the the reasonable
allocation uh changes somewhat so for
example you know 10 years ago um the
kind of expectation of Bitcoin was a lot
less clear um you know was it was a
newer uh more kind of um emerging asset
every time Bitcoin goes through another
big cycle and is still here and larger
and more mature in various ways uh with
more clarity around its future um the
sense but allocation likely gets a
little higher um and at some point you
know maybe the returns diminish after a
certain point but then you're starting
from a larger allocation to it basically
as it as it transitions from emergent
money to just utility money basically
it's money that is just it's money now
um that kind of change is the percent
that that I think makes sense in a given
kind of you know volatility minded
portfolio AB you guys have both
mentioned mentioned the 6040 portfolio
and I just wanted to reference a tweet
that I saw from Lind I think it was
yesterday I think it was making its
rounds regarding an interesting story of
of birds in the street maybe if you look
at the bond market and um so just just
curious your perspective on that because
unfortunately a lot of people get
allocated to a larger Bond allocation
than maybe they wanted to just because
of their options in some of those
portfolios those traditional portfolios
um maybe do you want to discuss the
risks there
at all in regards to bitcoin yeah yeah
Bond the bond Market's been fascinating
because you know it's it's been doing
very well for 40 years on a risk
adjusted basis basically low volatility
decent returns but starting uh you know
several years ago call it 2016 2017 2018
especially that 2018 2019 period it was
such it was in such a big bubble and it
was one of the quietest bubbles around
basically yield got down to like nearly
0% in some in some countries they were
negative so to their negative yielding
bonds including some corporate bonds
meaning you're paying a a a corporation
to borrow money from you um and there at
one point at the peak there was over $18
trillion dollars worth of negative
yielding bonds primarily in Japan and
Europe but even even in the United
States and other developed countries
they were very very low which means that
you basically have risk without any
possibility of return um and uh
obviously the inflation wave that ensued
wiped out the purchasing power of those
bonds and then ition even a modest
increase in yields severely damaged
their prices their purchasing power um
and so and what we're seeing now is I
think there's there's kind of a very
slow realignment happening but most
investors are still thinking over this
past 40 years um you know had 40 Years
of declining interest rates if anyone's
not familiar with the bond market uh
falling bond yields means higher bond
prices um and so you had 40 Years of
declining bond yields Rising bond prices
good income just good kind of low
volatility growth but going forward
after we bounced off zero rates or
negative rates in some cases there's not
a ton of upside left in the bond market
and they still face risks from inflation
and higher yields and fiscal dominance
and all that and so they can have good
years and bad years just like any other
asset but overall the kind of the the
the risks are skewed to the to the
downside and but a lot of portfolio
models have not in any way adjusted uh
yet and so they're still kind of in the
mindset that bonds are defensive asset
and you know 2022 is a really good
example because in usually if you have a
decelerating economy so purchasing
manages indices rolling over other sort
of rate of change indicators about the
economy rolling over normally bonds do
pretty well and that was an environment
where bonds sold off along with a
decelerating economy and there's
certainly risk that that could happen in
in future kind of deceleration Cycles uh
and I I just think that the market has
not really adjusted to that kind of um
you know changing Market regime
[Music]
yet
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