Due to the current high interest rates and the continued high level of macro uncertainty, the role of gold and Bitcoin as "broad equivalents" and "offshore liquidity pools" may be further enhanced in the future, and the "slow but continuous" liquidity expansion brought about by the gradual decline in US and EU interest rates is also conducive to the long-term rise of gold and Bitcoin, and commodities may also benefit from this. However, it must be admitted that it is not a good time to invest in stocks and altcoins.
Judging from the macro information and market trends in the past two months, "uncertainty" seems to have become the theme of 2025. The Trump administration's domestic and foreign policies have led investors to rebalance their portfolio in global assets, and the risk of "reflation" caused by multiple reasons has gradually begun to emerge. Under the above circumstances, the Fed & ECB's interest rate cut policy has become indecisive, while for the Bank of Japan, "how much to hike" is the focus of the policy.
Compared with 2024Q4, liquidity expectations for February and March have obviously become elusive. The BoJ is no longer willing to provide investors with free carry dollars, and the expected interest rate peak above 1.5% means that carry trade investors must further cut their positions. The Fed's rate cuts are still ongoing, with three rate cuts expected in 2025, but even in 2027, interest rates may remain above 3%, which means that any financing leverage will face considerable costs.
Unlike the 1990s, the current economic environment is no longer stable. Tariff wars, trade wars, stagflation risks, and policy uncertainty risks are hitting the US market in turn, and investors are constantly rebalancing their portfolios across multiple markets driven by risk aversion, which means that any "risk-taking" investment faces the dilemma of poor risk-return ratio.
The interest rate expectations implied by SOFR futures show that even if there is a total rate cut of 75bps in 2025, the interest rate level in 2027 may still be above 3%. Source: CME Group
In this case, we have to focus on asset classes with good liquidity and low overall risk. When we press the "Filter" button, precious metals, government bonds, indices, and Bitcoin appear in our options. So, which assets will perform relatively better in the next period?
Who is the Ace? Gold
Gold is one of the macro asset classes that has impressed us since the beginning of 2025. Since the beginning of the year, the price of gold has risen by nearly 19%; in contrast, SPX has fallen by 5.46%, and BTC, which is regarded as "digital gold", has fallen by more than 10% due to multiple factors. As one of the assets with the most extended trading history in human history, with "interest-bearing assets" spread across various markets, investors led by central banks have begun to regain their preference for gold, which is undoubtedly worth pondering.
From the perspective of traditional asset management, gold is a safe-haven asset. Investors usually hold gold only when uncertainty rises and sell it when uncertainty eases. However, traditional methodology underestimates the multiple attributes of gold. Gold is not only a safe-haven asset and a store of value asset but also a payment system and "liquidity container" with a long history. In the ancient Babylonian era, gold already had its own weight unit, "shekels", for payment use, and in international trade during the world wars, the gold-based payment system became a practical alternative after the unavailable of fiat.
With the gradual establishment of the credit currency system and the modern foreign exchange market, the payment systems of various countries have gradually become less dependent on "hard money" and more "financially engineered", that is, stabilizing the value of the local currency by controlling the ratio of the local currency to a basket of currencies. In international trade, the currency with the widest circulation and the lowest transaction cost, the US dollar, is often used.
Why is the US dollar widely used in international trade? The following prerequisites are essential:
- The United States is the world's largest consumer market; most commodities and goods are denominated and settled in US dollars.
- It is backed by high-credit-rated assets such as gold and US treasury bonds and has the highest currency credit rating.
- The US national policy is sufficiently robust, continuous, and predictable so that the US dollar can play the role of a "safe-haven asset" under certain circumstances.
- The cost of the payment system based on the US dollar is lower than that of other payment systems, resulting in a lower willingness of US dollar holders to switch to other payment systems.
The above assumptions have been valid since the 1990s. The global investment system based on the US dollar has been running steadily for more than 40 years, and the global trade system based on the US dollar has been running steadily for more than 70 years.
However, times have changed. The new US government has abandoned the above assumptions to a certain extent. In their view, the US dollar can be used as a weapon or a bargaining chip; policies can be used as a tool to pressure opponents or as a handle to make profits for themselves. As for global trade? That was a matter of the last generation; "We want to bring jobs back to the United States."
In this case, investors must start wondering: Can the US dollar still play the role of a "safe-haven currency", and can US dollar-denominated assets maintain their original earnings momentum under the dual uncertainty of economy and policy? There is no clear answer, but uncertainty means increased volatility and additional investment risks - which means that it is acceptable to reduce the proportion of holdings of US dollar-denominated assets (including the US dollar), pocket the gains obtained since 2023 and wait for new opportunities.
As a result, a rare scene appeared in the global markets for many years: the US dollar, US stocks, and US treasury bond yields fell simultaneously. At the same time, the prices of gold and silver fluctuated upward, accompanied by a sharp rise in EU and HK stocks after several years of mediocre performance.
Amid high levels of macro uncertainty, investors have poured funds into U.S. Treasuries as a haven. Source: ustreasuryyieldcurve.com
This is not surprising: when the federal civil service system is fundamentally threatened, and policy loses its robustness, the dollar-based investment and payment system is no longer as "reassuring" as it used to be. Investors' stock accounts may be frozen at the request of a government order, and traders' dollar accounts may be sanctioned when they wake up one morning. As a result, almost everyone starts to consider alternative payment systems and tends to diversify and reduce risk. At this time, investors recall gold's long-standing alternative payment attributes, and it becomes natural to embrace gold again.
In fact, the demand for gold has been growing for more than a year. As the demand for alternative payment systems increases, everyone from central banks to individuals chooses to increase the proportion of gold in their portfolios. The instability of US policies is unlikely to improve in the short term, which means that in addition to payment needs, the demand for relatively high-risk investments (such as stocks) will also be suppressed, which is beneficial to low-risk underlying assets such as gold. At the same time, the gradual interest rate cuts by central banks in many countries around the world are also underway, and the expansion of cash liquidity has not yet ended; liquidity will continue to flow into gold when there is "nowhere to go".
In the derivatives market, traders expect the same. The implied probability distribution of GLD shows that the probability of further gold price increases in the coming months is more than 52%, and the probability gradually increases over time. In the crypto market, the options of PAXG, the proxy token of gold, show a wholly bullish pattern from the near term to the long term, which is not found in other crypto underlying assets. Whether from a fundamental or expectation perspective, gold is still one of the best investment underlying assets for now. Gold Is Ace.
Source: optioncharts.io
Source: Amberdata Derivatives
Bitcoin: The faltering King
Compared with gold, BTC, which is regarded as "digital gold" by Powell and many investors, has not performed well. After once being just one step away from the new historical record of $110k, the price of BTC has fallen nearly 20% from its peak.
Like US stocks, BTC is also a victim of asset allocation rebalancing. Since more than 90% of transactions linked to BTC are settled in US dollars, it is difficult for BTC to be unaffected by the broad sell-off. At the same time, BTC's high volatility also makes it difficult for investors to re-add it to their portfolios or maintain its original proportion when the level of macro uncertainty is high. This is not difficult to understand: high-volatility assets can bring excess returns during risk-taking periods. However, if the position closing time is incorrect, high-volatility assets will also bring huge losses when risks are off. Therefore, investors will choose to reduce their positions in high-risk assets, such as BTC, once any adverse factors appear.
As for professional traders (such as hedge funds), they do not hate the high volatility of BTC. Still, they take more "delta neutral" positions to profit from it rather than holding directional exposure. A typical strategy is to buy BTC or BTC ETFs while opening a futures short position on CME to obtain the premium of BTC futures - this is the typical "carry trade".
At the peak, the open interest of CME BTC futures once exceeded $20 billion. As the crypto carry trade unwind occurred, open interest fell by more than 40% once. Source: Velodata
At the peak of carry trade, traders could once obtain an annualised return of more than 20% "near risk-free", which is rare in traditional markets. Such high absolute returns once pushed the open interest of CME BTC futures to nearly $22.8 billion. However, as investors began to sell off dollar-denominated assets in January, the long demand for BTC futures has gradually declined, significantly impacting the yield of carry trade. When the yield of the carry trade is almost the same as that of Treasury bonds, traders are unwilling to take the "already low" risk to obtain a risk premium of less than 100bps, which leads to more unwinds.
But from another perspective, the recent sell-off is actually more like the result of investors' sentiment "returning to rationality". The market from November 2024 to February 2025 was largely due to the optimism and speculation brought about by the "Trump Trade". In fact, before considering Trump's additional impact on BTC prices, the option market priced BTC at about $82k at the end of 2024 in the "best case scenario".
Of course, we all know that BTC successfully broke through $100k before Christmas last year, and the price at that time was mainly due to optimistic expectations for the Trump administration. After investors "returned to rationality", as the impact of the "Trump Trade" on BTC prices was gradually eliminated, the current BTC price has returned to the level it should have, driven by macro liquidity.
The good news is that macro liquidity is still expanding. The Fed and the ECB still maintain a robust rate-cut plan, and the scale of cash liquidity on the chain has increased by more than $100 billion in the past 15 months. Therefore, in the medium and long term, major asset classes will still benefit from the expansion of liquidity, including BTC. In fact, despite the current poor performance of BTC prices, investors still maintain a bullish attitude towards BTC's long-term price performance. In addition, BTC still has a risk premium significantly higher than that of risk-free assets, which means that it is at least an "investable" asset for the time being.
Source: glassnode
Source: Amberdata Derivatives
The core issue is still risk aversion. Although BTC is one of the lightest crypto assets tied to the US dollar (think about it: BTC-margined derivatives trading still occupies an important position in institutional-level trading), investors' concerns about the US dollar will still have a significant adverse impact on BTC's price performance. BTC's "de-dollarisation" seems to be a possible solution. Gold can be used as a unit of account, and so can BTC; both can be converted into multiple fiat currencies.
However, this is not easy: investors need to get used to the currency standard again, and they also need to consider more complex exchange rate risks. Therefore, when risk aversion is difficult to ease in the foreseeable future, BTC's performance with US dollar-pegged assets will remain significantly synchronised.
Queen, Jack, low card
Stock indexes are the hardest hit by risk aversion. Since stock indexes are actually between the "priority" and "secondary" asset tranches, when economic policies are stable, stock indexes are still one of the preferred investment targets for investors in the interest rate cut cycle. However, when economic policies are no longer stable, stock indexes become "secondary assets" because the uncertain policy environment makes it difficult to support economic expansion and corporate development - this is precisely what we have experienced in recent months.
Under high instability, investors have two choices: reduce exposure and diversify investments. This is also what happened in the global stock index market recently: while SPY and QQQ fluctuated and fell, the STOXX50 index representing EU stocks rose 8.93%, while the Hang Seng Index rose sharply by 19.38%. Although the results of the March FOMC Meeting temporarily stabilised market sentiment, investors remain cautious about re-holding risky assets pegged with the US dollar.
Source: Tradingview
It is worth noting that this change may not be short-term. As the Trump administration continues to operate for at least another four years, the United States is gradually losing economic stability and predictability due to tariff wars, trade wars, and radical economic reforms. In contrast, the policies of Europe and China have become relatively more stable and predictable. Of course, Europe and China are also trying to seize this opportunity: Germany is trying to use military demand to revive the economy, and the Chinese government is actively meeting with multinational companies and outstanding local companies and conveying China's determination to stabilise economic policies to the outside world.
In the above situation, more funds will enter the risk asset market linked to the euro or Hong Kong dollar through offshore channels, but how long these funds will stay is still in doubt. In the few days when risk aversion sentiment has briefly declined recently, it is not difficult to see the trend of funds flowing back from Hong Kong stocks and European stocks, which means that risk assets linked to the US dollar are still the first choice of investors at least for now; but whether it will still be the case in the next few years has changed from a "definite conclusion" to an "unknown". At present, individual stocks and stock indexes have become "Low Cards" in the investment portfolio; only when cross-market asset allocation is impossible, investment in individual stocks and stock indexes should be considered.
Altcoins and meme stocks can be regarded as the "Lower Cards" with the lowest points. The situation they face is obviously worse: high financing rates suppress investors' speculative sentiment, and in the case of risk aversion, assets in the "extra-high risk tranche" are often sold first and may be bought back at last. Although new topics and hot spots continue to emerge in the altcoin market, the flow of investors' funds will not lie: in the past year, BTC's market share has increased from 52% to 61.2%, while the market share of altcoins has dropped below 20%.
Source: Coinmarketmap
Compared with the stock market and the altcoin market, the excellent performance of commodities since the beginning of the year has made it the "Queen" of the investment portfolio. Tariffs increase trade costs, hinder supply chains, and bring imported inflation, while countries' reserves of precious metals and other commodities for risk aversion have further pushed up commodity prices.
At present, the tariff war has the greatest impact on raw materials related to industrial products, such as non-ferrous metals. The increase in copper prices is even higher than that of gold, and silver is not inferior to gold. The tariff and trade wars are unlikely to end in the short term, which means that the demand for reserves is unlikely to ease in the short term, bringing considerable potential for the performance of commodities.
Source: Tradingview
What about government bonds? Government bonds can be said to be the "last but not bad" choice. As one of the few interest-bearing assets that maintain positive returns, the 4% yield is still attractive enough compared to the negative yield of the stock market. When there is no choice other than the dollar-pegged risk assets, government bonds are the "Jack" in the hands of investors - although not as good as Queen, King and Ace, but still better than holding "Low Cards". In addition, government bonds are also among the strongest in terms of risk resistance and stability.
T-notes are still one of the assets that can be considered for now. Source: Tradingview
So, next...
It's time to develop a defensive investment strategy. How do we get some extra returns while preserving the previous principal and investment returns in the current macro environment? Maybe you can try the following asset allocation strategy:
- Increase the proportion of treasury bonds in the portfolio to 40%-50%.
- Increase long-term exposure to gold to about 20% of the portfolio.
- Invest 10% of the funds in the commodity market.
- Invest 5%-10% of the funds in Bitcoin.
- Reduce stock-related exposure to no more than 5% of the portfolio.
- Hold 5%-20% cash to wait for better investment opportunities or as a reserve.
- Holding altcoins or meme stocks is not recommended unless necessary.