The Cryptocurrency Elephant in the Room

Abstract

...is "should I buy any?". Under Bayesian portfolio theory, ongoing zero weights in cryptocurrency are surprisingly difficult to generate. With ten years of prior data, equity investors would need very pessimistic priors on mean returns to never buy cryptocurrency: -10.6% per month for Bitcoin, and -19.6% for a diversified cryptocurrency portfolio. Most priors that involve never purchasing cryptocurrency imply shorting it. Optimal weights are generally small, non-trivial (1-5% magnitude), frequently positive, and smooth. The certainty equivalent gains from cryptocurrency are comparable to international diversification and prominent anomaly portfolios. Costs (storage, fees) would need to exceed 21-39% annually to deter trading.

Presented by David Solomon