Bitcoin vs. sovereign bonds: Why are some investors making the shift?

Why are some investors choosing Bitcoin over government bonds?

Historically, sovereign bonds like the US Treasurys, Japanese government bonds and German Bunds have been go-to assets for risk-averse investors. They are usually perceived to be minimal-risk assets offering steady returns. However, since the emergence of Bitcoin 13 years ago, the narrative of Bitcoin as an alternative to bonds has been gradually growing in the minds of investors.

The interplay between the Federal Reserve’s balance sheet and the M1 and M2 money supply is also a significant consideration to help understand why some investors are shifting to Bitcoin (BTC). 

• The M1 money supply is a measure of the total amount of money readily available in an economy. It includes the most liquid assets: cash, demand deposits (checking accounts) and other similar checkable deposits.
• The M2 money supply is a wider measure of money supply than M1. It includes all of the M1 assets, combined with savings deposits, retail money market funds (MMFs) and small-time deposits.

The US Federal Reserve’s actions on expanding and shrinking its $6.69-trillion balance sheet directly influence the M1 and M2 supply, which in turn affect inflation, bond yields and investor confidence in fiat assets. When the Fed adds or removes money, it changes how much cash (M1) and savings (M2) are available. These changes affect inflation, how much interest bonds pay and how much people trust traditional (fiat) money.

In the past few years, the Fed has kept the federal funds rate in a high range between 4% and 5% and has also signaled that rate cuts might not be necessarily imminent. On May 26, 2025, Moody’s downgraded the US debt rating from AAA to AA1, citing fiscal instability and political dysfunction.

Additionally, the Japanese bond crisis of 2024-2025 exemplified how a shift in the relationship between bond demand and yields, amplified by US tariff policies, can impact investor sentiment and the safe haven status of government debt. In this macroeconomic scenario, Bitcoin is increasingly cementing its position as a hedge against inflation. 

As of June 13, BTC has outperformed the S&P 500, gold and the Nasdaq 100 by posting 375.5% gains over a three-year period, as compared to 59.4%, 85.3% and 86.17%, respectively.

The rise of Bitcoin’s prominence in the modern investor’s portfolio

The US Securities and Exchange Commission’s approval of the spot Bitcoin exchange-traded funds (ETFs) on Jan. 10, 2024, was a watershed moment for Bitcoin’s role in the portfolio of modern investors, both traditional and retail. The 12 Bitcoin spot ETFs trading in the US have total assets under management (AUM) of $132.5 billion as of June 11, 2025, per data from Bitbo. It’s a monumental figure considering these ETFs have only been trading for over 300 days.

Below is the complete timeline of the US SEC approving the listing of Bitcoin spot ETFs:

• 2013: Cameron and Tyler Winklevoss, founders of the Gemini cryptocurrency exchange, file the first-ever spot Bitcoin ETF application with the SEC. Grayscale launches the Bitcoin Investment Trust.
• 2017: Citing concerns about the asset’s market maturity and manipulation, the SEC rejects the Winklevoss ETF application.
• 2018: The SEC rejects the refiled ETF application from the Winklevoss twins by citing inadequate market controls.
• 2020: Grayscale converts its trust into an SEC reporting entity, aiming to increase the transparency of funds.
• 2021: The SEC approves the first US Bitcoin futures ETF application filed by ProShares while continuing to reject spot ETF applications.
• 2023: Grayscale sues the SEC after the rejection of its application to convert its Bitcoin trust into a spot ETF. A US Appeals Court rules that the SEC failed to justify the rejection, thus forcing it to reconsider the application.
• Mid-2023: The world’s largest asset manager, BlackRock, files for a spot Bitcoin ETF. A wave of spot Bitcoin ETF applications follows from firms such as Fidelity, Franklin Templeton, WisdomTree and others.
• Jan. 10, 2024: The SEC approves 11 spot Bitcoin ETFs, which begin trading on US exchanges the following day.

Since then, the inflows and outflows of these ETFs have varied along with the sentiment of the market, but they have broken multiple records and are expected to continue to do so due to institutional interest in the asset. The chart below shows the daily inflows and outflows of the US BTC spot ETFs since their launch on Jan. 11, 2024.

According to calculations aligned with the modern portfolio theory (MPT), the Sharpe ratio of a portfolio can be optimized around a 16% allocation to Bitcoin, as revealed in a report by Galaxy released on May 27, 2025. 

• Modern portfolio theory (MPT): It is a framework developed by Nobel Laureate Harry Markowitz in the 1950s to construct optimal investment portfolios. Since then, it has been used as a trusted analytical tool to model scenarios of an ideal portfolio allocation to different asset classes.
• Sharpe ratio: This metric measures the risk-adjusted return of an investment. It’s a way to measure how much return you’re getting for the risk you’re taking.

At this level of portfolio allocation, the Sharpe ratio for BTC would be around 0.94. In comparison, the estimated Sharpe ratio of US Treasury bonds is between 0.3 and 0.5, per data from Curvo. This means US Treasury bonds offer less return for the same level of risk. In simple terms, Bitcoin gives you about 0.94% extra return for every 1% of risk, making it a more efficient investment than bonds if you’re comfortable with the higher risk. 

Did you know? On June 9, 2025, BlackRock’s iShares Bitcoin Trust ETF (IBIT) became the fastest ETF in history to surpass $70 billion in AUM. As senior Bloomberg ETF analyst Eric Balchunas showed on X, the fund reached this mark in just 341 days, five times faster than the SPDR Gold Shares (GLD) ETF, the previous record holder.

Bitcoin or sovereign bonds: Which one is more lucrative to investors in 2025?

There are several reasons why even risk-averse investors are considering investing in Bitcoin instead of sovereign bonds — from yield, volatility, regulatory considerations and accessibility, among others.

Below is a comparative overview of the two asset classes and their unique features for investors:

While the returns on Bitcoin are not assured, the asset’s price reached an all-time high of $112,087.19 on June 10, 2025. PlanB’s stock-to-flow model estimates that, at the rate as of June 12, mining the total BTC supply would take around 55 years, without accounting for halving events.  Accounting for halving events, the total supply of 21 million Bitcoin will be mined by 2140. This low rate of inflow into the supply contributes to the narrative that Bitcoin is a scarce asset, which will only become scarcer as Bitcoin halving events cut down the block rewards on each new block mined on the network by 50%.

Billionaire investors like Larry Fink, Stanley Druckenmiller and Paul Tudor Jones are increasingly turning to Bitcoin as a hedge against inflation and government mismanagement. Fink sees Bitcoin as a modern alternative to gold amid what he calls the highest embedded inflation in decades. 

Druckenmiller not only supports Bitcoin but has openly shorted US bonds, criticizing the Fed’s rate policy as disconnected from market reality. Meanwhile, Jones warns of spiraling US debt and expects policymakers to inflate their way out, reinforcing Bitcoin’s appeal as a store of value. Collectively, these Wall Street titans are signaling a shift: long Bitcoin, short bonds.

Did you know? Michael Saylor’s Strategy (previously known as MicroStrategy) has acquired 582,000 BTC since the company started purchasing the tokens in August 2020. These tokens were purchased at an average cost of $70,086 following its latest purchase of 1,045 BTC on June 9. Strategy currently owns 2.771% of the maximum capped supply of Bitcoin.

How Bitcoin’s fixed supply and easy access are disrupting traditional portfolio structures

The Bitcoin network’s inception led to the birth of a new financial asset class. BTC is one of the only assets in the world that is immutable, provenly scarce and has a permanently capped supply. 

Because it’s hardcoded in the core protocol of the network, there can never be more than 21 million Bitcoin minted. As of June 11, 2025, over 19.8 million BTC has been minted, per Bitbo data. This accounts for 94.6% of the total supply. 

On May 26, the Bitcoin network’s hashrate hit an all-time high of 913 exahashes per second (EH/s), a 77% increase from the 2024 low of 519 EH/s. The hashrate represents the total computational power that is used by the proof-of-work miners to validate transactions and add blocks to the network. This entails that miners increasingly need to spend more computational power to contribute to the network.

In contrast, the supply of sovereign bonds is set by the government, which can issue new bonds when needed. Thus, there is no perception of scarcity for bonds issued by the government.

Additionally, sovereign bonds are heavily limited by a few factors, especially for retail investors:

• Limited platforms for access: Retail investors often cannot access government bonds directly and have to rely on intermediaries like asset managers, banks or brokers.
• Complex settlement infrastructure: These bonds are typically cleared through institutional settlement houses like Euroclear and Clearstream, which aren’t designed for retail usage.
• Lack of immediate liquidity: Government bonds are only available to investors during the trading hours of that particular country, which doesn’t allow investors to unwind their position outside market hours, on weekends and on bank holidays.
• Foreign sovereign bonds: Purchasing foreign sovereign bonds requires investors to have access to international brokerage accounts and also involves currency risk and significant geopolitical risk.

Since Bitcoin is a decentralized and accessible asset with 24/7 availability, it overcomes many of the challenges that investing in sovereign bonds could pose. Additionally, as crypto wallets continue to improve user experience and simplify onboarding, and as access to both centralized and decentralized crypto exchanges expands, Bitcoin is becoming even more accessible at a rapid pace. This ease of access, when compared to sovereign bonds, is bound to aid investors contemplating the shift from sovereign bonds to BTC.