Research Review | 9 April 2021 | Bitcoin

How Much Bitcoin Should I Own? A Mathematical Answer
Adam Grealish (Betterment)
March 9, 2021
It goes without saying that this is a hard question to answer. But we can borrow a page from modern quantitative finance to help us arrive at a potential answer. For years, Wall Street “quants” have used a mathematical framework to manage their portfolios called the Black-Litterman model. Yes, the “Black” here is the same one from the famous Black-Scholes options pricing formula, Fischer Black. And “Litterman” is Robert Litterman, a longtime Goldman Sachs quant.
Without getting into too much detail, the model starts with a neutral, “equilibrium” portfolio and provides a mathematical formula for increasing your holdings based on your view of the world. What’s amazing is that it incorporates not just your estimate about how an investment might grow, but also your confidence in that estimate, and translates those inputs into a specific portfolio allocation.

Bitcoin: Magic Internet Money
Alex Pickard (Research Affiliates)
January 2021
Regardless of the reason for BTC’s astronomical price movement, investors should resist the temptation to chase the price. Extreme fluctuations in price invalidate claims that BTC is a store of value. Neither is it a capital asset, merely an entry in a digital ledger. BTC does not generate cash flows, and its only real use is to sell to someone else. High transaction fees make it a poor currency and negate claims of fungibility. The price of BTC is nearly certainly a bubble and likely manipulated. Investors should proceed with extreme caution.

Bitcoin: An Asset Allocation Perspective
Aric Lux (Light Finance)
April 2021
The key question that I sought to address in this piece was: “what role does Bitcoin have to play in an institutional caliber portfolio?”. In short, Bitcoin offers a highly attractive opportunity for managers who are long term focused and willing to expand their investment universe. One of the key takeaways is that Bitcoin’s reputed volatility is very real and will necessarily require that portfolio managers and boards allocate in a way consistent with their risk tolerance. But managing that risk appropriately is more than achievable.

Disappearing Volatility of Bitcoin
Mieszko Mazur (IESEG School of Management)
December 17, 2020
Bitcoin market capitalization has recently surpassed $1 trillion. According to the popular belief one of the key characteristics of bitcoin is its excessive volatility. This paper provides evidence that high volatility of bitcoin is largely a misconception. We show that bitcoin return fluctuations are lower than those of roughly 900 different stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks: Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, bitcoin volatility was lower than most of the above-mentioned asset classes. Significant decline in bitcoin volatility over the last decade renders it more “investable” by conservative investors.

Bitcoin vs Inflation: Can Bitcoin Be a Macro Hedge? Evidence From a Quantile-on-Quantile Model
Roman Matkovskyy and Akanksha Jalan (Rennes School of Business)
February 23, 2021
The purpose of this paper is to present a behavioral analysis on the impact of the pandemic on BitCoin (BTC) prices. How fear of COVID-19 influenced risk aversion on the part of the investors and BTC performance during the period 31.12.2019-30.09.2020. Most early studies that examine the influence of the pandemic on asset prices use as an explanatory variable the number of new cases. In this study, we show that the number of cases is not the appropriate variable to explain the BTC prices. In order to quantitatively include a fear index into our analysis, we employ a code which is based on the Google searches which include the term “Coronavirus”. The higher the index, the more the fear due to the pandemic. The empirical findings confirm our assumptions that the newly suggested fear index explains the BTC performance with increase statistical significance, and that the number of cases is not the most appropriate variable to explain the BTC prices during the examined period. The methodology and the outcome of our study could be useful to investors, practitioners and scholars whose intention is to examine how asset prices, BTC prices in our case, perform during periods of high stress.

The Economic Effect of Bitcoin Halving Events on the U.S. Capital Market
Dina El Mahdy (Morgan State University)
March 31, 2021
Bitcoin is a digital asset that was first mined in January 2009 after the global financial crisis of 2007-2008. Over a decade later, there is still no consensus across different market regulations on the classification, use cases, policies, and economic implications of bitcoin. However, there is an increasing demand for digital currency, as an alternative to fiat currency which would spur financial innovation and inclusion. This study reviews regulations on digital assets across countries. It further discusses some use cases for bitcoin to reduce financial risk and facilitate cross border transactions. The study also discusses challenges related to bitcoin such as: cryptocurrencies substitution, cross border financing, cyber risk and security, and benefits in terms of the effect of coronavirus on the speed of capital market innovation and hence bitcoin usage. The study concludes by examining the economic effect of bitcoin halving events on the U.S. capital market to better understand the influence of bitcoin on financial markets and key drivers of its intrinsic value. The empirical evidence from this study suggests that bitcoin halving events are associated with significant negative stock market reaction, signaling a trading tradeoff between cryptocurrencies and U.S. stock markets.

When to Buy and When to Sell Bitcoin?
Yosef Bonaparte (University of Colorado at Denver)
February 4, 2021
We employ several technical analyses models and account for investor’s sentiment to establish a benchmark on the optimal time to entry or to exit from the Bitcoin market. Unlike companies that they have quarterly earnings, Bitcoin is not a company with earning. Yet, we argue the Bitcoin “halving” is the closest to company’s earnings. Indeed, we show that one of the key determinant of Bitcoin price fluctuation is the Bitcoin “halving,” in terms of quantity and timing. We also examine how market distraction and liquidity influence Bitcoin price. Thus, we suggest entry when stock market distraction and/or liquidity is high and we are approaching the halving; exit otherwise. Collectively, we introduce two key determinants, investors’ distraction and Bitcoin halving, to understand Bitcoin price movement.

The influence of Bitcoin on Portfolio Diversification and Design
Md Akhtaruzzaman (Australian Catholic University), et al.
January 1, 2021
We employ a VARMA DCC-GARCH model to search for portfolio diversification with Bitcoin in global industry portfolios and bond index. We find lower dynamic conditional correlations between Bitcoin and industry portfolios & bond index, allowing an investment in Bitcoin to hedge the risk against industry portfolios and bonds. The most effective hedge in a Bitcoin/industry (bond) portfolio is to short Utilities sector. Results are robust to the use of US industry portfolios and a cryptocurrency index instead of global industry portfolios and Bitcoin, respectively. Our results can help investors make informed decisions with regard to risk management and portfolio analysis.

Who buys Bitcoin? The Cultural Determinants of Bitcoin Usage
Sean Foley (Macquarie University), et al.
January 9, 2021
We examine the relationship between national culture and a country’s Bitcoin usage. Given that Bitcoin is a high-risk currency/investment that is frequently used for illegal purposes and whose market is relatively opaque, we focus on the cultural dimension of individualism, which has been related to risk-taking behavior and overconfidence. Using unique data that includes the originating country for Bitcoin transactions, we examine the relationship between individualism and a country’s Bitcoin usage for a sample of 80 countries between 2009-2018. We find a significant and positive relationship between a country’s individualism and its use of Bitcoin consistent with cultural values affecting the demand for such high-risk currency/investments.

Bitcoin is Exactly Like Gold Except When it Isn’t
Claude B. Erb (retired managing director, TCW Group)
December 14, 2020
Bitcoin has been described as digital gold. Bitcoin is exactly like gold except when it isn’t. Over millennia, gold has gained a questionable reputation as an inflation hedge, a store of value and a safe haven. Gold’s price can arguably be decomposed into a “golden constant” fair price and a fair price deviation. Bitcoin has no track record as an inflation hedge, a store of value and a safe haven. Bitcoin’s price can arguably be decomposed into a questionable “bitcoin network” fair price and a fair price deviation. Both bitcoin and gold are about 50% above their “fair prices”.

Are Cryptocurrency Markets Efficient Markets?
Arjun Singh (independent analyst)
July 31, 2020
This paper examines the market efficiency of three key cryptocurrency markets namely: Bitcoin, Ethereum and Monero, before and during the COVID-19 pandemic. This research makes use of a Durbin-Watson test and a non-parametric runs test to test for weak-form efficiency, and two comprehensive event studies to test for semi-strong form and strong form efficiency. We conclude neither market can be considered efficient due to the presence of strong positive correlation, and inefficient reactions to our event studies. Despite this, each market became more efficient during the COVID-19 pandemic than before, due to the presence of weaker positive correlation during this timeframe, but inefficient, nonetheless. Thus, the study finds that of the tested cryptocurrency markets, none can be consider wholly efficient. This conclusion is consistent with the vast majority of existing literature.

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