(Kitco News) – For investors in Bitcoin (BTC) AND gold, May saw the value of their portfolios keep pace with the rise in the stock market, according to Charlie Morris, founder and Chief Investment Officer at ByteTree.
To help track the performance of Bitcoin and gold versus other assets, Morris uses the Vinter ByteTree BOLD1 Index (BOLD). This index invests in both assets on a risk-adjusted basis using past volatility, calculated using daily price movements.
“Due to their naturally low correlation, the diversification benefits of holding both assets have been unusually high,” a Monday report from Morris said. “Bitcoin prefers risk-on market conditions, while Gold prefers risk-off.”
“In May, BOLD rose by 4.3%, Bitcoin rose by 13%, and Gold rose by 1.8%, while equities rose by 4.3% in USD terms,” Morris said. “Last month, the target weights were 24.8% for Bitcoin and 75.2% for Gold. Price changes over the month led to the last day’s weights at 26.6% and 73.4%. This means the latest rebalancing at the end of May has seen 2.3% added to Gold, and correspondingly reduced from Bitcoin, to meet the new target weights.”
Morris noted that with Bitcoin outperforming Gold in May, “the price of a Bitcoin is once again close to 30 ounces of Gold. If it manages to pass 35 ounces, a new burst of growth is likely.”
“We don’t know if or when that happens, but the BOLD index benefits heavily during the rangebound periods, where the excess return is generated over and above the return from the assets themselves,” he said. “That is because if you accumulate the weaker asset each month, at the expense of the stronger, the process continually adds value as their prices cross over.”
“If Bitcoin and gold stayed within the 15-to-35-ounce range for years, BOLD would materially beat a Bitcoin and Gold mix that had not been rebalanced while maintaining less risk,” Morris said. “The process of monthly rebalancing is no more complicated than buying low and selling high.”
Turning to flows into Bitcoin and gold ETFs, Morris noted that “May saw a turnaround in flows as 23,302 BTC were added to the Bitcoin ETFs.”
“With around 13,930 BTC mined (450 per day) in May, that is a demand surplus, which has historically been bullish,” he said. “However, anyone holding Bitcoin can sell, not just the miners, and so there must be some selling pressure in the system, which is unsurprising in a strong year. That said, the trend is strong, and the Bitcoin price weakness seen in April has been reversed.”
On the gold front, “Gold ETF flows have improved as well,” he said. “After a prolonged patch of selling pressure, May was stable, with a week of strong inflows. At the very least, the outflows have stabilized.”
“The important point is how the Gold price has been so resilient in the face of such strong selling pressure,” Morris wrote. “When outflows turn back to inflows, the upward pressure on the gold price will be unopposed.”
Combined, Gold and Bitcoin ETFs now hold a total of $250 billion in assets under management, “a number that seems to keep growing,” Morris said.
“Demand for alternative assets increases during times of high inflation,” he noted. “We had the surge during the pandemic, which peaked shortly after the war in Ukraine. That period of cooling is behind us, as shown by the US 10-year inflation expectations. They are now sitting above a rising 12-month moving average (red), which suggests the trend is once again rising.”
For investors looking for a way to overcome rising inflation, Morris noted that “BOLD is an effective inflation hedge.”
He said that over the past year, “Bitcoin’s performance has returned 149% compared to Gold's 19%,” while BOLD “managed a respectable 47% return.”
“However, BOLD performs best, at least in relative terms, when Bitcoin is under pressure,” Morris said. “Since the notable high in April 2021, ahead of the Chinese mining ban, BOLD has demonstrated the vitality of regular rebalancing. I remind people that BOLD was never designed to beat Bitcoin, but to enhance Gold.”
“Staying on the theme of notable Bitcoin highs, BOLD has nearly kept up with Bitcoin since the 2017 high, with much lower risk and volatility,” he said. “Since then, Bitcoin is +255%, while gold is +84% and BOLD +186%.”
Morris noted that over the past year, Bitcoin’s volatility “has fallen significantly since the early days and is now no more volatile than a typical blue-chip stock.”
“The volatility for Bitcoin and Gold over the past 360 days was observed to be 39.2% for Bitcoin and 12.6% for Gold,” he said. “That means Gold’s volatility is slightly higher than last month, while Bitcoin is unchanged. This has resulted in new target weights of 24.3% Bitcoin and 75.7% Gold using this formula.”
BOLD is also able to help Bitcoin and gold investors track the performance of the “Magnificent Seven” stocks, including Apple and Nvidia. Morris noted that while these stocks have continued to perform well, “it is remarkable that the very best internet stocks simply mimic Bitcoin.”
“That is unsurprising because Bitcoin is native to the internet, and as the web grows, so does Bitcoin,” Morris said. “Large technology companies need to innovate and spend money to stay ahead. For Bitcoin, it simply needs to remain relevant. Given that the entire world’s wealth management industry has yet to allocate capital to Bitcoin, it strikes me that the risk lies with the Mag 7, where they have already parked trillions of dollars, much more than it does with Bitcoin.”
He added that it’s a similar story for gold and commodities. “We have seen strength in metals and food prices, yet we have also seen strength in Gold, which remains highly liquid and resilient at times of crisis, such as in the early stages of the pandemic,” he said.
“I demonstrate that against copper, which has been highlighted as a potential performer as electrification drops into a higher gear,” Morris said. “The correlation has risen, but it is a reminder that Gold not only keeps up with commodities over time but leads.”
“It could be said that Bitcoin is the leading technology asset, while Gold is the leading commodity,” Morris concluded. “The BOLD Index brings them together and adds value through improved risk management and monthly rebalancing transactions. BOLD has seen higher returns, with lower volatility than the NASDAQ.”
