While US Treasury bond yields have remained at record lows in recent years, bitcoin continues to show strength as a long-term store of value. In 2021, the average return on bonds remained close to 2% and bitcoin ended last year with a return of close to 60%.
Bonds have traditionally offered investors a way to diversify away from traditional stocks, leading to a portfolio composition of 60% stocks and 40% bonds. In 2021, bitcoin doubled the returns of traditional stocks, while 60/40 portfolios, on average, They offered 15% return.
From the point of view of traditional assets, the 60/40 portfolios, resulted in an 8% return last year, after adjusting for inflation. While that performance is higher than the median return for those investment instruments over the last 21 years, bonds have posted very unappealing annual returns.
The following graph shows the annual returns of the 10-year treasury bond in the last 5 years, in contrast to the evolution of the price of bitcoin. While the monthly yield of said bond is currently 2.05%, the return of bitcoin in the mentioned period is more than 3,900%.
Although in the course of the first quarter of this year there was an 8% drop in the price of bitcoin, the return of the first cryptocurrency far exceeds that of bonds in medium and long-term periods.
This declining yield on bonds makes them less attractive to investors, as CriptoNoticias reflected at the end of March 2021. The economist Ray Dalio affirmed at that time the notorious weakness of the dollar and that “investing in bonds is stupid” . For the founder of the investment fund Bridgewater Associates, the return on cash is negative relative to inflationwhich is why it is preferable to borrow the money and invest it in other alternatives.
Diversifying 60/40 portfolios with bitcoin
Despite the growing interest of traditional investors in bitcoin, this cryptocurrency is still perceived as a risky asset due to its volatility. One way to demonstrate the benefits of investing in bitcoin is by including small percentages of this asset in 60/40 portfolios and measuring their impact on returns.
An Ecoinometrics analysis from last year, reviewed by this medium, measured the impact of including bitcoin in a traditional investment portfolio in which there are various percentages of Standards & Poor’s 500 index assets and gold.
In the study, Ecoinometrics found that bitcoin had made a 100% return from 2013 to 2021, while the S&P 500 showed a 9% return, and gold reflected a 1% drop. Ecoinometrics claims that the percentage of bitcoin does not need to be that high to get noticeable performance improvements, and that a monthly rebalancing of the portfolio can offset the volatility of bitcoin.