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The spending on infrastructure for AI applications is immense. Major US technology companies will spend over $800 billion in AI hardware and data center capex this year alone. This huge sum of investor capital is stuck in a narrow basket of technology stocks, creating a novel portfolio composition problem that traditional portfolio diversification is ill-equipped to solve.
The exposure to concentration risk in AI-exposed equities is further compounded by the debt that is used to finance both private capex in infrastructure as well as government stimulus in this space. The capital flood into semiconductors, data center cooling, power generation as well as networking infrastructure is furthermore financed through a complex web of corporate as well as sovereign debt. The physical constraints in terms of chip production capacity, power as well as thermal management are real and will likely keep the AI boom extended for years to come. However, the credit architecture required to support this capex is a highly vulnerable system.
Currently the U.S. federal debt is above $40 trillion and the yields on U.S. Treasury bonds are at a level not seen since the 2008 financial crisis. For Bitcoin Suisse this development presents a material market risk that in turn threatens to affect equity-heavy portfolios in an unfavorable way. For a long time the yields on fixed income instruments such as bonds were seen as a suitable means to hedge equity risks in a portfolio.
The way that portfolios are constructed has fundamentally changed. The prolonged period of inflation during the 2021-2023 cycle, and the associated interest rate hikes, led to an unprecedented situation where stocks and bonds simultaneously decreased in value. This makes a tenet of investing over decades invalid, namely that the bond portion of a portfolio is meant to serve as a protective buffer in the event of stock market declines.
A new variable needs to be added to the portfolios in order to increase the degree of diversification and to reduce the correlation between assets as well as the tail risks. Instead of using other risk assets, which are mostly traded in a positive correlation, Bitcoin Suisse recommends adding a new asset class to the portfolios. The company assesses Bitcoin to be the only genuinely uncorrelated asset class, which possess the characteristics of a risk asset (high liquidity, high volatility) as well as those of a traditional hard asset (monetary scarcity).
Bitcoin can be added to the portfolio as a third, independent asset class. Until capital is released from the AI trade and is invested in a more balanced way, stock concentration risk will continue to exist. As long as debt levels on the federal books constrain Treasury yields and lead to a break down in stock/bond correlations, the conventional portfolio construction models will fail. Bitcoin offers a means to reduce portfolio correlation and tail risk in a way that is not possible with traditional fixed income.
Source: CoinDesk
