While US Treasury bonds currently produce a 2% return monthly, Bitcoin has grown by 100% annually in the last eight years. The percentage of the cryptocurrency does not have to be so high to improve its performance dramatically in a portfolio.
US Treasury Bonds have maintained low returns in recent years, but Bitcoin continues to be a robust long-term store of value. In 2021, bonds produced an average return of nearly 2%, and Bitcoin yielded almost 60%.
Bonds had historically offered investors diversification away from traditional stock, leading them to compose portfolios with 60% shares and 40% bonds. Last year, the returns of Bitcoin doubled those of the above assets, while 60/40 portfolios offered a 15% return on average.
Regarding traditional assets, 60/40 portfolios had an 8% performance last year, after adjustments for inflation. That performance is superior to the median of the return of those investment instruments over the last twenty-one years. However, the annual profits of bonds have been very unattractive to investors.
Over the last five years, the annual returns of the 10-year Treasury Bond have contrasted to the evolution of the Bitcoin price. The current monthly performance of that bond is 2.05%, but the return of Bitcoin in the above period is higher than 3,900%.
During the first quarter of 2022, the Bitcoin price has dropped by 8%, but its return has far exceeded bonds in the medium and long term.
Bonds are less attractive to investors due to the decreasing performance of bonds, said a report in late March 2021. At that time, renowned economist Ray Dalio stated that the US dollar was significantly weak and that investing in bonds was stupid.
The founder of Bridgewater Investment Associates considers that the cash performance is negative relative to inflation. For that reason, he said it is preferable to borrow money and look for other investment options like Bitcoin.
Investors Should Diversify Their 60/40 Portfolios with Bitcoin
Although the interest from traditional investors in Bitcoin is growing, many still perceive that cryptocurrency is a risky asset due to its volatility. One way to prove the benefits of Bitcoin is to include small percentages of the crypto asset in 60/40 portfolios. After that, it is possible to measure the impact on their profitability.
Last year, an analysis by Ecoinometrics measured the impact of including Bitcoin in a traditional investment portfolio. It has various asset percentages of the Standards & Poor 500 index and gold.
Ecoinometrics found that Bitcoin had a 100% return, S & P 500 showed a 9% return, and gold reflected a fall of 1% from 2013 to 2021. The on-chain analytics tool indicates that the percentage of Bitcoin does not have to be so high to improve performance dramatically. That would also allow a monthly portfolio rebalancing can compensate for the volatility of Bitcoin.
Although the price of Bitcoin has dropped, it has historically proven that it can rebound from its all-time lows. Besides, investors can see the advantages of including a small percentage of the pioneering cryptocurrency in their portfolios.
By Alexander Salazar
