The Cryptocurrency Elephant in the Room

83 Pages Posted: 29 Oct 2022 Last revised: 8 Aug 2023

See all articles by Ran Duchin

Ran Duchin

Boston College - Carroll School of Management

David H. Solomon

Boston College - Carroll School of Management

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Xi Wang

Peking University - School of Economics

Date Written: August 1, 2022

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.

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

JEL Classification: C11, E42, G02, G11,

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

Ran Duchin

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

David H. Solomon (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

Xi Wang

Peking University - School of Economics ( email )

Beijing
China

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