Bitcoin, S&P 500, bonds, and risk assets are all experiencing a shift in preference among investors as the third quarter comes to a close. Losses are expected for both Bitcoin and the S&P 500, indicating that investors are leaning more towards bonds over stocks and other risk assets. The equity risk premium, which measures the difference between the S&P 500’s earnings yield and the yield on the 10-year Treasury note, has dropped to its lowest level since 2009. This makes government bonds a more attractive investment option compared to stocks and other risk assets.
Government bonds gain favor
Treasury securities, considered risk-free, are offering higher returns than stocks and other risk assets. This shift in preference is also evident in the decline of the spread between the S&P 500’s dividend yield and the 10-year Treasury yield. With enticing bond yields, investors have less incentive to invest in Bitcoin, which is seen as a risk-on asset.
Although Bitcoin is often regarded as a haven asset similar to digital gold, it has historically been a pure play on liquidity and has acted as a lead indicator to stocks. This means that when investors are more interested in bonds, they are less likely to invest in Bitcoin and other risk-on assets.
Bitcoin’s challenges
Alex McFarlane, co-founder of Keyring Network, pointed out that Bitcoin is a non-yield bearing, risk-on asset and will be negatively impacted by a high USD risk-free rate due to portfolio rebalancing. He said, “The suggestion that we can go forward ignoring rates markets and trade BTC as an orthogonal portfolio component doesn’t square unless BTC can offer a risk-free rate – which it cannot, unlike POS [Proof-of-stake].”
This statement highlights the challenges that Bitcoin faces as investors shift their focus to bonds and other risk-free assets. With no risk-free rate offered by Bitcoin, it becomes a less attractive investment option compared to government bonds.
Impact on the market
The decline in the equity risk premium and the spread between the S&P 500’s dividend yield and the 10-year Treasury yield indicate a preference for bonds over stocks and other risk assets. This trend has made government bonds a more attractive investment option than Bitcoin and other risk-on assets.
As a result, the market may see a decrease in investments in Bitcoin and the S&P 500, while bonds experience an increase in demand. This shift in preference can have significant implications for the overall market, potentially leading to a decline in the value of risk assets like stocks and cryptocurrencies.
Conclusion
In conclusion, the current market trends show a preference for bonds over stocks and other risk assets, such as Bitcoin and the S&P 500. This shift is driven by the decline in the equity risk premium and the spread between the S&P 500’s dividend yield and the 10-year Treasury yield. Investors are finding government bonds more attractive due to their risk-free nature and higher returns compared to stocks and other risk assets. This trend may lead to a decrease in investments in Bitcoin and the S&P 500, while bonds see an increase in demand, potentially impacting the overall market and the value of risk assets.
