The first quarter of 2023 ended on a relatively positive note for risky assets, with the S&P 500 index up around 7%. However, after the setbacks of several US banks and Credit Suisse, the fear of another "black swan" is dominating investor sentiment. Indeed, the latest Bank of America survey of fund managers shows that a systemic credit event is now considered by investors as the most important tail risk, replacing de facto the risk of inflation remaining high over time. 

Systemic credit event overtakes inflation stays high as biggest tail risk

Source: BofA Global Fund Manager Survey

How can investors protect their portfolios against this type of event (called "tail risk")? 

Anti-fragile assets

While illiquid assets (venture capital, infrastructure, private debt, hedge funds, etc.) can be considered as a solution to improve the risk/return trade-off, many investors want to keep their portfolios liquid. In this case, they can seek de-correlation by including so-called "anti-fragile" assets in the portfolios. 

"Anti-fragility" is a concept that was developed in 2013 by Nassim Nicholas Taleb, the author of the best-selling book, The Black Swan. The thesis developed is that the opposite of fragile is not solid or robust, as one might intuitively think, but "antifragile." Fragile is anything that does not stand up to the test. Solid is everything that resists numerous tests. Antifragile is anything that gets better with testing. The concept applies to everything: politics, health, education, economics, urban planning... and, of course, the markets. In finance, the anti-fragile likes volatility, uncertainty, shocks, financial crises, etc.

Gold, the king of anti-fragile assets?

In his book, Taleb did not comment on the case of gold as an anti-fragile asset. However, Stöferle and Valek, analysts at Incrementum and followers of the Austrian school, have addressed the issue. In their view, gold is neither particularly fragile, nor completely robust or anti-fragile. Its value lies in its trustworthiness, a prerequisite for any form of money. Gold has always been recognized as a medium of exchange and as a safe haven currency in times of crisis: "Gold is not a perfectly anti-fragile asset, but has, during severe crises, exhibited anti-fragile characteristics." 

The analysts from Incrementum highlight some of gold's robustness (not anti-fragility) characteristics: it is inherently stable/durable: it is known to be resistant to air, water, fire, and chemical attack; there is a stable supply of it; it is expensive and slow to mine.  In this sense, gold is robust. Gold is also one of the most liquid assets in the world in terms of the volumes in which it is traded, which helps to make it robust, even in times of stress. 

The value placed on gold is subject to wide price fluctuations. The gold market is manipulated and can be subject to speculation. As a result, the gold market is not immune to bubbles, so the price of gold tends to be fragile.

Bitcoin, the new anti-fragile asset?

Bitcoin is often referred to as "digital gold". Indeed, its time-limited supply is one of its main similarities to precious metals. The "white paper" published before its launch in 2009 stated that Bitcoin production would be capped at 21 million by 2140. Today, 90% of the tokens have already been mined. It is estimated that there are less than 0.4 Bitcoins per millionaires on the planet. This ratio is expected to decline, as the number of millionaires grows faster than the number of Bitcoins in circulation. The process of introducing new bitcoins into the economy is therefore the opposite of fiat currencies, for which an unlimited amount of bills are currently being printed. Bitcoin is now scarcer than gold and has a deflationary tendency that will take it from a supply growth of 1.8% to 0.9% in four years and only 0.4% in the following four years.

Bitcoin emerged at a time when one of the biggest black swans hit the U.S. and global economy: the great financial crisis of 2008. Since its launch, bitcoin's monetary policy has made it the most robust and scarce currency on the planet. 

Bitcoin has survived many mistakes, shocks and even so-called "hard forks." Bitcoin has been declared dead many times. Bitcoin mining has been banned in several countries, causing huge mining farms to be shut down immediately without any consequences for the Bitcoin network. 

Conclusion

While the de-correlation properties of gold are accepted by most investors, the case of bitcoin is much more controversial. Yet the historical data is unequivocal. As the chart below shows, adding a 5% allocation to bitcoin in a 60-40 portfolio would have improved the risk-return trade-off, regardless of the period considered. Due to the high volatility of bitcoin, a small allocation or investment in a fund of hedge funds dedicated to digital assets may be appropriate in the current macroeconomic environment.