An Investor’s Guide to Crypto

Abstract

We provide practical insights for investors seeking exposure to the growing cryptocurrency space. Today, crypto is much more than just bitcoin, which historically dominated the space but accounted for just a 21% share of total crypto trading volume in 2021. We discuss a wide variety of tokens, highlighting both their functionality and their investment properties. We critically compare popular valuation methods. We contrast buy-and-hold investing with more active styles. We only deem return data from 2017 representative, but the use of intraday data boosts statistical power. Underlying crypto performance has been notoriously volatile, but volatility-targeting methods are effective at controlling risk, and trend-following strategies have performed well. Crypto assets display a low correlation with traditional risky assets in normal times, but the correlation also rises in the left tail of these risky assets. Finally, we detail important custody and regulatory considerations for institutional investors.

[All data updated through June 30, 2022]

Keywords: Crypto, currency, bitcoin, ether, gold, custody, NFTs, inflation hedge, stablecoins, DeFi

JEL Classification: C58, E42, E51, G10, G11, G12, G21, G23, G24, K24, K42, L86, O31