Dear Hedgeye Nation,
We just hosted nine of the sharpest investing minds on HedgeyeTV for a 3-day bonanza of world-class interviews. During our semiannual Hedgeye Investing Summit, Hedgeye CEO Keith McCullough was joined by Jurrien Timmer (Director of Global Macro at Fidelity).
Below is a brief excerpt and transcript from the interview. You can access the entire hour-long interview, as well as the 8 other financial market webcasts, by registering here.
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In this clip from the second day of Hedgeye’s Investing Summit, Hedgeye CEO Keith McCullough and Jurrien Timmer (Director of Global Macro at Fidelity) break down how they risk manage the volatility of cryptocurrencies and various strategies to position them within a portfolio.
“I trigger people when I say this. I’ve always put Bitcoin and crypto in my asset allocation box with commodities because they have the same type of volatility attributes,” McCullough explains.
“I did my deep dive on Bitcoin about a year ago and my conclusion was it is kind of like a more convexed version of digital gold,” Timmer elaborates. “Bitcoin has been designed to be priced inelastic, so people see the volatility as a bug of the system, but I think it’s actually a feature of the system.”
McCullough: It's a weird thing, and I trigger people when I say this, but I call Bitcoin a commodity, I just put it in my commodity box because it's got similar volatility attributes in a shorter time series, of course, because it's not that old.
But I've always put Bitcoin and crypto in my asset allocation box of commodities, because they have the same type of volatility attributes. What you have now and I always, always smaller in those Jurrien, because I volatility adjust my asset allocation.
So my max position in coffee, for example, or oil for that matter, is always going be 4% because of the volatility. Oil volatility will go to 300, when the oil price went negative and you don't want to be a long oil when that happens.
But my question is, it's weird because everyone's getting concerned about the stock market correcting 10%, 12%, 20%. And the things that are the riskiest on a volatility adjusted basis are losing their vol week by week, month by month, commodities and Bitcoin in particular.
Timmer: Yeah, it's you know, it's we're in a fascinating point in the cycle and, you know, seeing the disparity or the divergence between Gold and Bitcoin, which, you know, I mean, I kind of did my deep dove on Bitcoin about a year ago.
And my conclusion was, it is kind of like a more convex version of digital gold. But, you know, Bitcoin has been designed to be priced inelastic. Right. So it's like the volatility people see it as a bug of the system. But I think it's actually a feature of the system because, you know, with a commodity, if demand goes up, you know, you have a supply response and you don't have that in Bitcoin.
It may be mining goes up a little bit, but still you're going to have so only so many coins. And so it is going to be remain inherently volatile, although over the years probably it will become a little bit less.
But it's interesting, you know, the Sharpe Ratio of Bitcoin and I don't think a lot of people appreciate this is the same as a 60-40, you know, S&P 500, and it's about one and it's about one in a quarter.
It's the same Sharpe Ratio as a 60 40. But, you know, the S&P is down is in a 20 percent draw down maybe a quarter of the time. And Bitcoin is in a 20% drawdown like 80% at the time, but it's going up 200%. So you don't you know, you don't you don't really notice it.
But, you know, I think for me, the lesson for Bitcoin is that a little goes a long way.