Yale Economist Believes 4 to 6% of Investment Portfolio Should Contain Bitcoin
In a recent report published by YaleNews, it has come to our attention that a new study assessing cryptocurrencies and their functions has been conducted. Several conclusions have been since made and it appears that many strongly suggested opinions on the digital assets have not been accurate.
The study conducted by Yale Economist, Aleh Tsyvinski and a Ph.D. student, Yukun Liu stemmed from wanting to understand cryptocurrencies, as many still remain confused. The duo seems to have been interested in understanding the standpoint of crypto investors and analysts and were eager to see whether they do in fact represent a whole new asset class, can be an alternative to traditional, fiat currency and whether or not the market’s current volatility is something to worry about.
Here is a breakdown on what was shared by Tsyvinski to YaleNews:
Sharpe Ratio Indicates Crypto Returns Are Normal
Tsyvinski, who also serves as a professor, revealed that he used the Sharpe Ratio, one that “measures performance of an asset by adjusting for risk”, to see the correlation between return and volatility. As per their findings, crypto returns outweigh the implied risk volatility might bring. He also noted that crypto returns are much higher than traditional stocks. In particular, he shut down the issue of volatility by simply stating,
“So, if you look at return versus volatility, cryptocurrency looks more or less normal.”
Crypto Versus Traditional Currency
In assessing whether cryptocurrencies are in fact an alternative to traditional currency, Tsyvinski believes that the former should hold two traits: store of value and unit of account. To see whether or not cryptocurrencies act like stocks, the duo supposedly “examined 155 potential risk factors in the finance literature,” and it turns out that “none of them account for the returns of cryptocurrencies.”
Not only did their 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 shut down the popular notion that cryptocurrencies can serve as a unit of account and store of value.
Tools To Help Assess Crypto Performance
Although cryptocurrencies have been concluded as being different to traditional currencies and investment options, Tsyvinski argues that many existing financial tools can help to predict crypto performance. First, he mentions the Momentum Effect, which is “when an asset increases in value, it will tend to rise even higher”.
As an example, the duo noted is given that Bitcoin rises in price by 20 percent, it is a good sign to invest in it. Second, he argues that public interest [see FOMO or FEAR] can either bring up or down prices of crypto. The argument made here is that any positive news tends to positively impact the crypto sphere, while search terms like “Bitcoin hack” does the opposite.
Crypto Disruption Across Industries
Many analysts have expressed that cryptocurrencies are highly likely to disrupt any given industry to date. To assess the accuracy of such a theory, Tsyvinski considered 354 U.S industries and 137 Chinese industries and asked, “Are the returns on the stocks in those industries affected by cryptocurrency?”
It turns out that 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.
Amount Of Bitcoin Investors Should Typically Hold
The long-awaited question finally gets an answer! Tsyvinski tells investors that before anything, one should invest based on their comfort level – whether it implies the associated risks or how hopeful they are of a particular project. At the same time, he argues that investors who have faith in Bitcoin should “hold 6% of your portfolio in Bitcoin,” adding that those who trust it will do “half as well […] should hold 4%.” Finally, those who are still skeptical about its ability to disrupt industries, should stick to a portfolio consisting of at most 1% of Bitcoin.
What are your thoughts on this Yale study? Are you surprised to see that the duo has been able to shut down common beliefs within the crypto sphere? Comment below!
See our guides on smart investing: