Risk-Free Return vs Return-Free Risk

To investors,

US Treasuries have long been considered the risk-free return. You could buy these assets, hold them to maturity, and you were guaranteed a pre-determined return. There was no risk because the return was paid by the US government and no one seriously worries about a US default that would prevent Treasury holders from being paid.

I don’t believe this is the correct way of viewing the world anymore though. US Treasuries are now a return-free risk.

Read that again. Return-free risk.

What do I mean? Investors who are chasing the illusion of yield are facing a near certainty their capital will be destroyed by the lackluster performance of the bonds. Use $TLT (iShares 20+ Year Treasury Bond ETF) as an example.

The ETF is down 8.5% in the last 6 months.

The 1-year performance is worse at negative 12%.

And the 5 year performance shows a whopping 32% decline.

It doesn’t matter how much yield you thought you were getting paid, holding bonds delivered no return and lots of risk. Imagine what happens when interest rates retract to lower levels in the coming months too.

This flipping of risk-free return in US Treasuries to return-free risk will be a defining development for the next decade in finance. Trillions of dollars are sitting in a global 60/40 portfolio with US Treasuries as a major component of their asset allocation. At some point, common sense must win out over doctrine.

This brings me to another development that seems to be happening simultaneously — bitcoin is becoming the risk-free return for digital natives.

In the same way that US Treasuries were the “safe” asset that was backed by the US government, bitcoin is becoming the “safe” asset that is backed by the strongest computer network in the world. That may sound insane to traditional investors, but I hear and see it from digital natives every day.

They view bitcoin as their reserve asset which gives them the greatest confidence over the long run. They view bitcoin as a resilient asset that will continue to appreciate into the future. There is no real “risk” of the asset going to zero. There is no worry about a bleak future for the asset built to survive centuries.

These digital natives are also using bitcoin as a benchmark for investment decisions. Can I allocate to X or Y and achieve a higher rate of return than bitcoin? This sounds similar to traditional investors asking “why would I invest in X or Y when I can earn 5% on T-bills right now?”

Treasuries are becoming the return-free risk and bitcoin is becoming the risk-free return. The transition from the traditional doctrine to the new one will be slow and steady, yet it is inevitable. Things in motion tend to stay in motion.

If you haven’t started thinking about this transition, you should start doing it now. The implications are going to be far-reaching. And you are likely to change some of your investment decisions because of it.

Have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

Alex Thorn is the Head of Firmwide Research at Galaxy Digital.

In this conversation, we talk about bitcoin, bitcoin mining, ETFs, regulation, politics, global adoption, potential problems, token unlocks, Galaxy Digital, and more.

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