In general, institutional investors used to set aside 30% of their funds for the purchase of bonds, which act as hedge against unexpected market declines. Nevertheless as financial terrain is undergoing rapid transformation, Villaverde and Ng state that the approach is no longer relevant.
“… the hedge doesn’t work anymore. That’s because decades of hyper-growth in world debt markets. That plus massive money-printing to prevent them from collapsing… has totally changed the financial landscape. After inflation, gov’t bond yields are near (or below) zero – and will continue to be for the foreseeable future. Even before subtracting inflation, yields are already near-zero or negative. As a result, the classic bond hedge is now broken.”
Villaverde and Ng cited the inability of bonds to boost the value of company’s wealth during the outbreak of Covid-19 induced sell off earlier this year. Even though they exhibited a small uptrend amidst the overall market crash, the appreciation aggregated to a third of the decline made by the S&P 500 index.
As the effectiveness of bonds fades, analysts anticipate a minor portion of funds conventionally set aside for bonds to move into Bitcoin and gold.
“As we write, roughly $30 trillion is sitting in government bonds. Suppose 10% of that amount finds its way into gold and Bitcoin. That works out to an exodus of $3 trillion. And if that is split evenly, we’d end up with… $1.5 trillion going into gold – which is 15% of gold’s market cap (now about $10 trillion). And… $1.5 trillion going into Bitcoin – which is 4.4 times its market cap (now about $338 billion).”
The duo’s report has received backing from other market analysts. Preston Pysh informs his 120,000 Twitter supporters that it is wrong to perceive that Bitcoin is slowly turning into a substitute of gold.