Balancing Crypto and Commodities in Portfolios

While Wall Street extending its winning streak after the S&P 500 hit new record highs to close out the first half of this year, the index capping a remarkable recovery from a spring sell-off of about 20%.

Investors are hopeful that Trump will strike trade deals to ease tariff tensions, but uncertainty over trade wars still loom.

While gold had its best half since the second half of 2007, the precious metal rallying over 25% the first six months of this year.

And the crypto market's total value rose modestly by 3% in the first half of 2025.

The performance was mixed.

Bitcoin surging about 13% while falling 25%, and Solana losing 17% as Altcoins stumbled.

As we head into the second half of this year, I'm joined by Jim Weiderhol, commodity and product manager at Bloomberg.

Well, Jim, welcome.

Thank you so much for joining me.

Well, first and foremost, here we are the first trading session.

And for the second half of 2025 and as we kick off the month of July, a lot to look back on for the first half of this year.

So if you're a portfolio manager and you're looking at risk adjusted returns for crypto versus commodities, give us an understanding of the landscape.

Sure thing.

Well, first of all, thank you for having me, and I find it pretty interesting that we're talking about digital assets, the newest asset class in a place where equities have been trading since 1792, right?

Um, but yeah, core equities are still a mainstay in portfolios, but we're seeing increasing institutional adoption of Bitcoin and other cryptocurrencies as well.

Commodities are also picking up in terms of flows back into the portfolio mix, and there's a good reason for that.

There's a lot of Fundamental reasons for commodities, but also crypto has had a lot of positive tailwinds in terms of what we're seeing from the government.

It's a conducive environment and commodities in crypto, they are firmly in the alternatives piece of a portfolio.

So typically they're smaller percentages of a portfolio.

Some investors like asset owners, endowment and pension funds tend to have 20% to 30% of an allocation, but you typically see anywhere from 1 to 10%.

Crypto is a little more volatile than equity commodities.

They, although the volatility has basically halved over the last year or so with the institutional adoption.

Um, so right now we're seeing probably a 1% allocation to crypto across the board, but commodities historically, when you look at the empirical research, 5 to 10% is what you would see.

We have a little bit less than that now, but people use both asset classes for diversification and inflation hedging, and you see a small percentage of the portfolio helps give you some benefits there.

So the first half of this year, you know, we've seen some massive volatility in equities and Bitcoin and cryptocurrency has also sometimes traded as a risk asset and correlated to equities, but in general it has a lower correlation and commodities are much lower correlation to equities and traditional fixed incomes.

That's why people use both asset classes in their portfolio.

Um, and the general macro backdrop is basically one where it's different than what we've seen from the 2010s where the last few years has been a conducive environment for commodities in particular, so we see higher rates, higher inflation.

We see a deglobalization trend and we also see most recently the dollar depreciating, which most commodities are traded in US dollars.

So when the dollar goes down, that tends to be appreciative to the commodities asset class.

Yeah, and Jim, I'm glad you brought this up because when we look at the performance of the US currency for the first half of 2025.

Based on the latest data points which I know you pay attention to, we had the worst start for the US currency since 1973, and that is really significant.

And given everything that's happening and the story regarding American exceptionalism, what do you think we can expect in the second half and why does it matter so much that we're paying attention to the US currency?

Well, it's It's hard to say where anything is going to go from here.

I understand that positioning in short dollar positions is pretty extended, but that doesn't mean you can't move lower.

You see that historically with currency moves where it tends to break through a support level and then could potentially move lower.

But yeah, you've seen a lot of flows, equities still at the start of the year.

From US equities, more international based, but then most recently we've seen a lot of inflows we've had a record amount of inflows into equities in the last week or two.

So you know we've climbed this wall of worry ever since the lows in April and I brought a chart, but I don't know if you can show it where I just charted the commodities that we show by the Bloom.

Commodity index, which is just a broad commodities index that versus Bitcoin and Bitcoin did move lower with equities while BCom tended to move sideways.

So commodities in this year did what it was supposed to do in terms of the diversification aspect, and you see gold at all-time highs making new all-time highs regularly, and that's a large part of that is the dollar depreciation.

Yeah, and a lot of moving parts here, so I do want to shift our attention back to correlation patterns.

So what are you watching when it comes to crypto and commodities?

So correlations, they change over time, but they typically for alternatives tend to be less than 50% towards equities and fixed income.

Sometimes they're inversely correlated as well and with the With the cryptocurrencies moving more like risk assets, sometimes that correlation tends to be slightly higher and it's traded like a risk asset at times, but it is a diversifier.

So we're seeing from both asset classes that the diversification benefits where due to the low correlations they dampen overall portfolio volatility, and that's what people look for mainly when they when they get involved in these alternatives and it's still. arguable whether cryptocurrency is an inflation hedging asset, but commodities historically have been.

They have a much longer history, so you can look back to the history from the 1970s when we had high inflation and commodities performed very well during that period while equities struggled, and the most recent Fed meeting, they had a summary of economic projections and they're moving even more so towards a stagflationary environment where commodities tend to perform well.

So their estimates for the end of the year.

They forecast growth to be lower by 30 basis points and inflation to be higher by 30 basis points.

So commodities, if we are going to be in this stagflationary environment, they tend to do well and then certain sectors perform much better than others.

So historically we have precious metals and energy that stand out during a stagflationary environment.

That's what you saw in the 1970s with gold rising and oil rising during that time.

So if we're in a similar situation, you know.

Diversifying with commodities makes sense in this environment.

Yeah, and speaking of this environment and everything that you just highlighted, we know we have to pay attention to the fundamentals, what's happening in politics, geopolitics, as well as policy, and we're not just talking monetary policy, we're also looking at fiscal policy as well.

So what frameworks do you personally think are most useful when allocating capital between highly volatile assets such as crypto that we're talking about?

Sure, well, crypto and And commodities they are, as I said, sometimes they trade with economic growth, so sometimes they have a risk focus and commodities in particular, you know, they were affected by the tariff announcements this year.

So you see some instances like in copper where the price spiked ahead of potential tariffs because people were trying to stock up on inventory ahead of a potential tariff announcement.

And then you also see with the trade war with China change in flows of different commodities.

China used to import a lot of corn and grains, and now that's much less so recently as they moved to other places.

So yeah, this year has been heavily influenced by tariff policy in particular.

Yeah, and Jim, finally, before I let you go, I do want to ask you about Catalysts that you're watching.

As we head into the second half, because when we're talking about crypto and commodities, there's so many layers and whether we're talking about ags or energy or metals within commodities and in crypto there are the crypto majors Bitcoin, E, and some of the all coins, and there are different stories going on here.

So what are catalysts you're paying attention to?

Yeah, so in both asset classes we're seeing dispersion across the landscape.

Bitcoin is doing.

Well, but other cryptocurrencies aren't, and the same thing is going on in commodities where precious metals are performing well, industrial metals are doing well, but energy is about flat at this point.

Grains are down, but grains have been in a bear market for the last 3 years, so they tend to trade toward their cost of production levels.

But going forward, you know, we've had slightly less than expected economic data points come out over the last few months, so there is a potential.

For growth to be slowing, so we look at that in terms of the economic demand for all of these commodities, but also inflation ratings.

So if they start to pick up, then you'll see even more interest in the space.

And if people are coming around to the thought that cryptocurrency is an inflation hedge as well as a diversifier, there'll be more flows there as well.

OK, Jim, well, great having you on the show.

Thank you so much for joining me today at the New York Stock Exchange so much.

Thank you.