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The cryptocurrency elephant in the room

Author

Listed:
  • Ran Duchin
  • David H Solomon
  • Jun Tu
  • Xi Wang

Abstract

…is “should I buy any?”. Under Bayesian portfolio theory, ongoing zero weights in cryptocurrency are surprisingly difficult to generate. With 10 years of prior data, equity investors would need very pessimistic priors on mean returns to never buy cryptocurrency: −10.6 percent per month for Bitcoin, and −19.6 percent for a diversified cryptocurrency portfolio. Most priors that involve never purchasing cryptocurrency imply shorting it. Optimal weights are generally small, non-trivial (1–5 percent magnitude), frequently positive, and smooth. The certainty equivalent gains from cryptocurrency are comparable to international diversification and prominent anomaly portfolios. Costs (storage and fees) would need to exceed 21–39 percent annually to deter trading.

Suggested Citation

  • Ran Duchin & David H Solomon & Jun Tu & Xi Wang, 2025. "The cryptocurrency elephant in the room," Review of Finance, European Finance Association, vol. 29(6), pages 1721-1767.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:6:p:1721-1767.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaf037
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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