Bitcoin, S&P 500 Face Losses, Bonds Gain Appeal like 2009

Last Updated on 6 mins by Milan Novakovic

Bitcoin and the S&P 500 are both poised for quarterly losses, while bonds are gaining appeal not seen since 2009.

Bonds are becoming more attractive relative to other investment options, which is reducing the motivation to invest in Bitcoin. Some observers classify Bitcoin as a zero-yield risk asset.

Bitcoin (BTC) and the S&P 500, a key indicator of Wall Street’s performance, are both expected to conclude the third quarter with negative results. This shift in market dynamics is primarily due to a significant metric that underscores the superiority of bonds over stocks and other risk assets, marking the strongest trend since 2009.

Bitcoin, the leading cryptocurrency by market capitalization, is currently trading at $26,100, reflecting a 14% decline in the third quarter, assuming these losses persist until September 30th. On the other hand, the S&P 500, which serves as a global benchmark for risk assets, including cryptocurrencies, closed at $4,320.05 on Friday, experiencing nearly a 3% drop in the third quarter.

The equity risk premium, which measures the difference between the S&P 500’s earnings yield and the yield on the U.S. 10-year Treasury note, has dwindled to -0.58, its lowest point since 2009, according to TradingView. This spread has typically averaged around 3.5 points since 2008.

In simpler terms, the allure of investing in stocks and other risk assets has faded in comparison to the relatively higher returns offered by safe-haven government bonds. Treasury securities are perceived as risk-free because they are backed by the U.S. government, which has never defaulted on its debt. Consequently, the 10-year yield serves as a benchmark risk-free rate of return against which other asset returns are measured.

A similar trend emerges when comparing the S&P 500’s dividend yield to the 10-year Treasury yield, with the spread reaching -2.87, the lowest level since July 2007.

The attractiveness of juicy bond yields also diminishes the incentive to invest in Bitcoin. While some proponents view Bitcoin as a safe-haven asset akin to digital gold, historically, the cryptocurrency has primarily served as a reflection of liquidity, often acting as a leading indicator for stock markets.

Alex McFarlane, co-founder of Keyring Network, shared his insights on LinkedIn, stating, “Bitcoin is a non-yield-bearing, risk-on asset. As such, it will be adversely affected by a high USD risk-free rate due to portfolio rebalancing. 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].”

The S&P 500 earnings yield is calculated by dividing the sum of the earnings per share of the index’s component companies by the current index level. The dividend yield, on the other hand, represents the basic return an investor can expect from investing in the index’s constituent companies.

The gap between the earnings yield and the bond yield is a crucial factor for money managers to evaluate the relative attractiveness of these two asset classes.

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