Why any portfolio should contain from 1% to 6% of Bitcoin

The study by Yale economists Aleh Tsyvinski and Yukun Liu we discussed yesterday on whether cryptocurrencies do in fact represent a whole new asset class, an alternative to traditional, fiat currency and on whether the market’s current volatility is something to worry about show an interesting conclusion: crypto returns outweigh the implied risk volatility might bring and they are much higher than those of traditional stocks. “So, if you look at return versus volatility, cryptocurrency looks more or less normal”, professor Tsyvinski said.

In assessing whether cryptocurrencies are in fact an alternative to traditional currency, Tsyvinski believes that the former should hold two functions: store of value and unit of account. To see whether or not cryptocurrencies act like stocks, the two researchers supposedly “examined 155 potential risk factors in the finance literature,” and it turned out that “none of them account for the returns of cryptocurrencies.” Not only did findings show that cryptocurrencies do not have anything similar to that of stocks, they also had no relation with traditional currencies like that of the “Euro, Australian dollar, Canadian dollar, Singaporean dollar and the British pound.” This led them to reject the idea that criptos can serve as a unit of account and store of value.

Professor Tsyvinski also said that many existing financial tools can help to predict crypto performance. First, he mentioned the Momentum Effect, which is “when an asset increases in value, it will tend to rise even higher”. As an example, given that Bitcoin rises in price by +20.0%, it is a good sign to invest in it. Second, public interest can either bring up or down prices of crypto. Any positive news tends to positively impact the cryptos, while search terms like “Bitcoin hack” does the opposite.

Many analysts think that cryptos are highly likely to disrupt any given industry to date. To assess this idea, Tsyvinski considered 354 U.S industries and 137 Chinese industries and asked, “Are the returns on the stocks in those industries affected by cryptocurrency?” The answer is clear: industries related to healthcare and goods and services have been positively influenced by Bitcoin returns, whereas finance, retail and wholesale industries benefited more by Ethereum. An assumption he makes as to why this might be so looks the usefulness of Ethereum’s smart contracts, while Bitcoin as a payment method.

Finally, professor Tsyvinski told investors that, although one should always invest according to the associated risk or return, investors who trust Bitcoin should “hold 6.0% of your portfolio in Bitcoin,” adding that those who trust it will do “half as well […] should hold 4.0%.” Finally, those who are still skeptical, should stick to a portfolio consisting of at most 1.0% of Bitcoin.

Related Articles

Crypto carry trade (part one)
The current international monetary environment is characterized by ultra-expansionary monetary policies undertaken by…

Read more >
Passive and Aggressive orders
In forex trading, traders often use passive and aggressive orders in their daily…

Read more >
The Rate-of-Change (ROC)
In the technical analysis of forex markets, the Rate-of-Change (ROC) is a momentum…

Read more >