April 2021 was the first time in the last decade inflation (US CPI) came in significantly above the 1-3% “normal” rate we became accustomed to aligning with the FED 2% target (see Chart 1 below). Inflation is currently at its highest levels since the 1980’s, CPI YoY recently reported at 7%. Since the April 2021 inflation surge, the most inflationary period of the last decade, Bitcoin is down 34.8%.
Chart 1: US CPI year over year (YoY) percent change
Source: Auspice Capital Advisors, data from https://fred.stlouisfed.org/series/CPIAUCSL
Last month we updated an earlier review of inflation hedging product performance. Notably bitcoin was excluded as the (limited) available data does not support the thesis that Bitcoin is an effective inflation hedge. This was covered more extensively in our June 2021 blog, Bitcoin Myths.
The continued sell-off of Bitcoin in January undermines any idea that bitcoin is an inflation hedge. Moreover, it has been trading much more like a “risk asset”, highly correlated to equities, not a hedge nor a diversifier. To be clear, we have no position in Bitcoin or any other crypto currency. We came very close to adding Bitcoin futures to our flagship Auspice Diversified, however after extensive consideration some of our respected partners were not comfortable with this and we refrained.
Why are we pointing this out? It’s important to understand what you’re investing in, and what drives returns. It’s also important to understand that while Bitcoin has offered significant returns for early investors, it also come with substantially higher risk than other alternatives. With a 171.5% monthly volatility it has experienced two selloffs over 80% in the last decade. In the most inflationary period since the 1980’s Bitcoin is amongst the worst performing assets. As indicated in the original June blog, Bitcoin’s performance has been strongest in deflationary periods.
Over longer time periods the performance of Bitcoin is still amongst the top performing assets. Granted, like the experience of ARKK investors, we expect much of the AUM came later in the cycle and a majority of investors are likely sitting on losses(1).
There may be speculative value in bitcoin. But as an inflation or non-correlated asset hedge, the jury is starting to come back in…
For a review of inflation products that have performed well in the current cycle we recommend reviewing last month’s blog. For a more comprehensive long-term study see page 6 in the Auspice white paper “Commodity Investing in the Age of ESG and Inflation”. To summarize, in both the recent and historical inflationary regimes going back 100 years, commodities and trend following have delivered the strongest performance and inflation protection.
Table 1: Key performance metrics, 2020 – 2021, from last month’s blog
References
1. https://sl-advisors.com/arkks-investors-have-in-aggregate-lost-money
Disclaimer below
IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.
For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, or Auspice One Fund “AOF”, is only available to “Accredited Investors” as defined by CSA NI 45-106.