Bitcoin Portfolio Allocation Rising! with Lyn Alden

Summary

The 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

00:00

📈 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.

Keywords

💡Allocation

Allocation refers to the distribution of investments across different assets, such as stocks, bonds, or cryptocurrencies like Bitcoin. In the context of the video, it's discussed how the allocation to Bitcoin might change over time as its role in the financial market evolves. For example, as Bitcoin matures, its allocation in a portfolio might increase due to a clearer understanding of its future role as a form of money.

💡Bitcoin

Bitcoin is a decentralized digital currency that has been a subject of significant debate and investment. In the video, it's mentioned as an emerging asset that has gone through cycles of growth and maturity, with its role potentially transitioning from an emergent form of money to a more stable utility money.

💡6040 Portfolio

A 60/40 portfolio is a traditional investment strategy where 60% of the portfolio is allocated to equities (stocks) and 40% to bonds. This allocation is often considered balanced for long-term growth and risk management. The video discusses how this traditional model may not fully account for the changing dynamics of assets like Bitcoin and bonds.

💡Bond Market

The bond market is where debt securities, such as government and corporate bonds, are issued and traded. The video highlights the bond market's historical performance and the risks associated with it, particularly the shift from a period of declining interest rates to a potential future with higher rates and inflation.

💡Yield

Yield refers to the return on an investment, typically from interest payments for bonds or dividends for stocks. In the video, it's mentioned that yields on bonds were historically low, leading to a bubble and subsequently, the risk of negative yields. The discussion emphasizes the potential for yields to rise and the impact this could have on bond prices and investor returns.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses how inflation can erode the purchasing power of bonds, especially those with low or negative yields, which was a significant issue during the period of low bond yields.

💡Fiscal Dominance

Fiscal dominance refers to a situation where government fiscal policy, such as spending and taxation, has a significant influence over the economy, potentially at the expense of monetary policy. The video suggests that the bond market faces risks from fiscal dominance, which could affect bond prices and returns.

💡Volatility

Volatility is a measure of the dispersion of returns for a security or market index. It represents the degree of variation of a trading price series over time as measured by the standard deviation of returns. In the video, the speaker discusses the concept of a volatility-minded portfolio, which would consider the fluctuation risks of assets like Bitcoin.

💡Defensive Asset

A defensive asset is an investment that is expected to retain its value or perform well during periods of market downturns. Bonds have traditionally been considered defensive assets due to their lower volatility compared to stocks. However, the video points out that this perception may be changing as the bond market faces new challenges.

💡Market Regime

A market regime refers to a period in which certain conditions or trends are dominant in the financial markets. The video suggests that the bond market is experiencing a shift in its market regime, moving away from the long-standing trend of declining interest rates and towards a new environment with potential for higher rates and increased risk.

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