The Bitcoin Factor

Let's start with a pretty good article about factor investing from Morningstar. This is how they capture factor performance over the last 11 years.

Of the seven factors listed only quality, momentum, low volatility and value have taken turns at the top. Market cap weighting was second best three times and third best five times. Five of the factors have taken a turn being the worst including value which was the worst performer five times. There's a methodology twist in there somewhere because in past blog post we've seen years where market cap weighting did better than what they have laid out. The bigger point from their periodic table is that there is a lot of churning around with this and as we've said, no strategy can always be best. 

The following chart might be difficult to read but you can play around with some of these categories yourself  to try to look for any signal within the noise.

I used OVL for derivative income even though it's only been around since 2019. It's not a covered call fund, it sells put spreads as an overlay on top of owning the S&P 500. It has better upcapture relative to the older covered call funds. We have a decent sample size in terms of number of years and different types of events in those years including up a little for the broad market, down a little, up a lot, a crash and a bear market. 

In comparing straight up, only momentum and growth compounded meaningfully higher than market cap weighted (MCW) and quality was better the MCW by just a whisker. OVL is pretty close based on price only to MCW when you adjust the time to OVL's inception. 

I don't think I would expect minimum volatility to keep up with MCW over any long period so not much to say there. Value and dividends had slightly different paths to a similar outcome. Those two tracked closely until dividends broke higher in 2021, outperforming by almost 14%. Shareholder yield and buybacks tracked very closely to each other which makes sense until very recently. Early on SYLD lagged MCW badly but PKW was pretty close until it wasn't. PKW has been about 2000 basis points better than SYLD.

In the past I've said if you're going to go the factor route, you just need to accept that any factor you choose will at times be the worst. There should be times where it is the best too but value investors have been waiting a long time. I've also talked about blending factors to try to get some sort of superior risk adjusted result. 

If you go narrower than broad indexes then you already bring in most if not all the above factors plus any others out there through individual names or narrow based ETFs like sector, industry or niche. 

Other than for blogging purposes, I haven't spent any serious time looking for an optimal factor blend, it's not something I am going to implement IRL but I suspect a combo of a lot momentum and a little in something with some yield like maybe one of the newer derivative income funds might get close to be a solution. To be clear, I don't mean a single stock covered call fund that yields 60%.

Speaking of which, YieldMax, the king of the 60% yielding single stock, covered call ETFs, is planning to roll out a targeted yield fund that "yields" 12%. There's not a lot of information yet but this could be useful in terms of devising a depletion bucket. I put yield in quotes because I assume part of it will be return of capital. 

The last few weeks have been rough for bonds with duration. 

For the few months before I started this chart, they'd all gone up but it was a serious rollercoaster, check out the chart for yourself. Now, in less than a month they've been crushed. Maybe AGG's decline doesn't constitute a crushing but if you follow markets would you say this recent decline was a surprise? The commentary of course has been that Trump's proposed policies will be inflationary so maybe the FOMC will slow down and now the curve is steepening. I think everyone understands the argument here, will it turn out to be that simple of a cause an effect? I don't know but what I have more confidence in is the belief that bonds with duration continue to be sources of unreliable volatility. There are far better ways to offset equity volatility and bring in a little yield than riding 20 year treasuries. 

You probably know that Bitcoin has gone berserk since the election with the lift being attributed to the new administration being more favorably disposed to crypto and considering starting a Bitcoin reserve fund of some sort. At just above $88,000 as I type this, the market cap is $1.7 trillion. How much can the US buy at this level to have it matter? If they can buy $10 billion worth right now, I don't know if the market could accommodate that but Yahoo shows today's dollar volume at $126 billion so maybe, how high would it have to go in order for it to eventually matter to an economy the size of the US? 

Jim Cramer Tweeted out that there's no way Bitcoin goes to $1 million. Obviously, he has no idea, no one can know but think about that number. If it went to $1 million from here and somehow the US put $10 billion in today at $88,000, that would be an 11-12 bagger. At a 12x gain, so Bitcoin actually going to a million, $10 billion now would grow to $120 billion. That'd be a nice gain but would do very little in terms of scaling up to help the US government somehow. 

I'm not skeptical about $1 million, I just don't think it solves anything. If Bitcoin is not the savior of the world, it is a speculative asset that frequently goes up a lot. There's $7.5 trillion worth of gold above ground globally. There's not enough gold for the US to go back on the gold standard as some people talk about occasionally. Literally not enough unless you devalue the hell out of the dollar. 

There's talk that it's not a matter of if Bitcoin flips gold but when. In terms of being the currency that solves the world's problems, flipping gold means nothing, it's 4.4x from here. Again though, that'd be a nice gain. 

I guess I am less skeptical about it going to some sort of unfathomable number as I am about the market cap being worth quadrillions of dollars, or big enough to save the world. At $10 million per bitcoin or 120x from here, the market cap would be $208 trillion. The other day we guessed that maybe two billion people might be able to access any Bitcoin at all (a bigger number only supports my point), then each of those two billion people would have $104,000 worth of Bitcoin if you divided it evenly which is of course not possible. In the context of retirement or a lifetime of spending, $104,000 is a drop in the ocean.

It could go much higher and then disappear or forever remain a speculative asset that keeps going up but it is very difficult to see it being big enough to do what the touts say it will do. I've been saying for years, if you want to speculate, start with an amount that you could watch go to zero without damaging you financially. Then let it either succeed or fail and if it grows into a life changing piece of money, sell it and let it change your life. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.