An academic paper that examines the benefits of adding bitcoin to a portfolio of assets:

This post is a little off topic, but I still think it has interesting implications for the price of (some) cryptocurrencies. The link is to an academic paper that examines the benefits of adding bitcoin to a portfolio of assets:

http://waset.org/publications/10006245/analyzing-the-effects-of-adding-bitcoin-to-portfolio-

What’s striking is that bitcoin has a very high Sharpe Ratio. This is a very important financial ratio, because it adjusts the returns of an asset for its riskiness - in essence, it’s ‘easier’ to get higher returns if you buy a more volatile asset, but you should be adjusting those returns for the extra risk you’re taking:

In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk (and is a deviation risk measure), named after William F. Sharpe.[1]

Back to the article. If portfolios are optimized for the highest Sharpe Ratios then the allocations to bitcoin are off the charts. Here’s a portfolio that doesn’t use leverage. The optimal allocation is 98% bitcoin, 2% gold:

And here’s the portfolio that does use leverage. The optimal allocation is 3.45X bitcoin vs 2.5X short bonds:

Perhaps the people here with what seems on the surface to be irresponsibly high allocations to Maidsafe coin have actually made the smartest decision!

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The paper reads almost as an advertisement for Bitcoin. It’s an interesting calculation but you are assuming the asset in question will continue to appreciate at the same rate. Bitcoins rise will likely not continue at the same rate, probably not anywhere close, as it had during the 6 years, 2010 to 2016.

I do not see Bitcoin rising exponentially from these levels unless it is embraced by one of the major governments or we start to see some serious inflation in major currencies. China just put a damper on the market. The US will soon make a decision about a couple of Bitcoin ETF funds. This will be a huge decision and the sentiment is they are unlikely to be approved. If they were approved it would allow a huge influx of retirement and pension fund money that would no doubt set the stage for another wild bull run. A refusal would signal that the US government sees Bitcoin as a threat and it is unlikely to change it’s stance for quite some time.

All that being said, I have about 20% of my investment funds in MAID/BTC, 40% physical gold/silver, and 40% gold/silver stocks/etf, so I am not in total disagreement with the message. Older people may wish to play more conservatively with their money however.

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That’s not the case. The guy’s model is backward looking obviously. All it tells us is what the optimal portfolio allocation would have been if allocation decisions were made based on the Sharpe ratio, and given the standard distribution of MaidSafe coin and its performance, I’d hazard a guess that the same is true for it.

The other thing to bear in mind is that bitcoin (and MaidSafe coin by extension) are minimally correlated to other major asset classes:

So, bitcoin and MaidSafe coin, when compared to other assets, have a higher historic Sharpe ratio and are minimally correlated to all other assets. These are the two qualities that an institutional money manager would sell his first born children for.

So,I feel it’s safe to expect that when/if an ETF gets approved and institutional money can finally join the party it will do so in size.

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You are correct, they don’t assume it will appreciate at the same rate but it uses the average rate of return in it’s calculation. I’m saying that Bitcoins rate of appreciation over this period should be looked upon as an anomaly, and therefore any calculations based off of that should not be used to make investment decisions. I agree it would be a great way for people to diversify their investments because people have been herded into stocks, bonds, and real estate for the last 20+ years and these are mostly overvalued.

Institutional money would create even more volatility in the near term and prices could rise dramatically. This would create more investor interest and things could get really crazy. It would be a bad scenario for banks however, and I believe the influence the banks have over our government will prevent Bitcoin from becoming an investment option for pension funds and retirement accounts.

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You’re probably right. That said, I think the most valuable cryptocurrencies present what Albert Wenger calls a non-linearity, both in terms of the technology and their potential returns. I also think we are very early in this process. Has bitcoin been overhyped? Maybe, but I think not. When we see something similar to the dotcom bubble, where people are quitting their jobs to trade bitcoin, I’d be a lot more confident thinking its best returns are behind it.

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All that being said… Great topic, made me calculate my allocations currently. In 2013 I decided to take the majority of my savings from the bank, and invest elsewhere for all kinds of reasons, low interest rates being one of them. Every year I reallocate, reinvest, and diversify a few times, and I’m proud to say my investments tripled in value since 2013. Currently those original savings are allocated as follows.

2.9% bitcoin
32.3% maid
21.3% decorum
17.0% safe fs
10.4% silver (new coins 1oz - 1kg)
16.1% silver (antique coins, mostly Asian Dragon Dollars)

It’s quite funny to read that this allocation is somewhat optimized for a high Sharpe Ratio. :slight_smile:

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Hats off! Well done for getting close to the optimal allocation before reading the paper. I’m assuming of course that you aren’t the author :wink:

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lol correct. Crypto and silver just appealed to me over the years so it felt good to invest there. :slight_smile: