Getting Rich on Crypto

9 Pages Posted: 19 Jun 2018 Last revised: 8 Sep 2018

See all articles by Yael Grushka-Cockayne

Yael Grushka-Cockayne

University of Virginia - Darden School of Business; Harvard University - Business School (HBS)

Charles Goelz

University of Virginia - Darden School of Business

Davis Willingham

University of Virginia - Darden School of Business

Shawn Le

University of Virginia - Darden School of Business

Abstract

Dan Nickerson, a private wealth manager at a big firm, had just begun taking on his first set of clients when one of them asked his advice on whether he should add bitcoin to his investment portfolio. Nickerson noticed that the price of one bitcoin had risen from $276.30 in March 2015, to $20,089.00 in December 2017, and closed on March 2, 2018, at $10,977.40. This represented an almost unprecedented amount of volatility when compared to other asset classes, but also an incredibly impressive return over a short period of time. News about bitcoin was contradictory, with some analysts suggesting that bitcoin could replace gold as a means to hedge the risk of other asset classes and balance a diversified portfolio while still providing a positive return. Nickerson wondered how to advise his client. Did bitcoin represent a compelling investment opportunity? Furthermore, could cryptocurrencies as an asset class play a risk-reducing role in a balanced investment portfolio? How should he consider other emerging cryptocurrencies, like Ethereum and Litecoin, and could he even begin to forecast the future returns of cryptocurrencies? This case is suitable in courses covering decision analysis, finance, portfolio management, and investments.

Excerpt

UVA-QA-0897

Rev. Aug. 29, 2018

Getting Rich on Crypto

On March 5, 2018, Dan Nickerson pulled up pricing data for bitcoin on his laptop and contemplated how to advise a client who had asked him a tough question about an investment opportunity earlier that day. Nickerson, a private wealth manager at a big firm, had graduated from the Darden School of Business almost a year before and had spent the first eight months at his job getting up to speed on the finer points of financial planning and portfolio management. He had just begun taking on his first set of clients when he received this question from one of them.

Nickerson's client had read a recent article in the Style section of the New York Times, which declared, “Everyone Is Getting Hilariously Rich [on crypto] and You're Not,” and wanted Nickerson's advice on whether he should buy bitcoin and add it to his current investment portfolio (Exhibit1). Nickerson wasn't sure how to respond. He had read about the recent rise and fall of bitcoin—but his firm's managers hadn't exactly trained him on how to think about the investment potential of cryptocurrency. Nickerson glanced at the data and noticed that the price of one bitcoin had risen from $ 276.30 in March 2015, to $ 20,089.00 in December 2017, and closed on March 2, 2018, at $ 10,977.40. This represented an almost unprecedented amount of volatility when compared to other asset classes, but also an incredibly impressive return over a short period of time.

Nickerson then turned to his news aggregator and started to skim through recent articles on cryptocurrency. CNBC commentator Tom Lee stated that “Struggling Bitcoin Will Double by Midyear,” while Robert Shiller, the Nobel-laureate economist, said on the same network that bitcoin was a perfect example of the “faddish human behavior” that had led to asset bubbles and subsequent bursts in the past. Finally, some cryptocurrency analysts suggested that bitcoin could replace gold as a means to hedge the risk of other asset classes and balance a diversified portfolio while still providing a positive return.

. . .

Keywords: cryptocurrency, bitcoin, portfolio management, private wealth management, portfolio returns, portfolio risk analysis, portfolio diversification, asset correlation, portfolio theory, gold

Suggested Citation

Grushka-Cockayne, Yael and Goelz, Charles and Willingham, Davis and Le, Shawn, Getting Rich on Crypto. Darden Case No. UVA-QA-0897. Available at SSRN: https://ssrn.com/abstract=3198458

Yael Grushka-Cockayne (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=263650

Charles Goelz

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Davis Willingham

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Shawn Le

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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