The Cryptocurrency Elephant in the Room

...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.

Keywords: Cryptocurrency, Bitcoin, Bayesian Portfolio Theory, Portfolio Choice, Non-Participation, Beliefs, Investment Frictions

JEL Classification: C11, E42, G02, G11,

Suggested Citation: Suggested Citation

Duchin, Ran and Solomon, David H. and Tu, Jun and Wang, Xi, The Cryptocurrency Elephant in the Room (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=4258515 or http://dx.doi.org/10.2139/ssrn.4258515