Prominent professors from Yale has earlier this year said that Bitcoin is a social movement and an epidemic of enthusiasm. Robert Schiller, the Nobel Prize-winner and Yale professor, claimed that the Bitcoin phenomenon fundamentally is a speculative bubble. Then, just a few days ago, Yale researchers Aleh Tsyvinski and Yukun Liu, a Ph.D. candidate in the Economics Department have created the first comprehensive economic analysis of cryptocurrencies and the blockchain technology to predict price movements.
Now, Aleh Tsyvinski who has been a teacher at Yale University for many years is back in the news and states that everyone who believes in Bitcoin and cryptocurrencies to do as well as they did in 2017, should allocate 6% of their investment portfolio in cryptos. If you think it will do half as well as it did in 2017, you should allocate 4%. If you think it will do worse, then you should still invest 1%.
How are the billionaires investing in cryptocurrencies? It is always good to study how the rich invest to be able to do the same. But what did precisely Tsyvinski find out? He found that the return is higher than the risk implied by the volatility.
“We documented a high return but with a lot of volatility. Does the high return compensate for the high volatility? This is called the Sharpe ratio, which measures the performance of an asset by adjusting for risk. Surprisingly, we found that cryptocurrency’s Sharpe ratio shows that the return is higher than the risk implied by its volatility.”
Tsyvinski also writes that according to their calculations, the risk of Bitcoin falling to zero is 0,3% which could be compared to the probability of euro crashing which is 0,009%. Even though the chance is seemingly small, you should allocate a small amount of your portfolio, as stated above. Some billionaires have not heeded this advice and invested more than a few percents.
Earlier this year, the billionaire and co-founder of Avenue Capital Group Marc Lasry, said in an interview with CNBC that he had allocated more than 1% of his portfolio into cryptocurrencies. He is also very positive about Bitcoin and noted that it could be touching the $40,000 mark sooner rather than later. Other billionaires like Mike Novogratz, Peter Thiel, and Steve Cohen Hops have also invested a significant part of their investments into the crypto space.
Investors should remember that, as of today, the cryptocurrency market is still in its infancy, without the involvement of major institutional investors. Trusted custodian solution like Coinbase has emerged in the past month, and others are developing a custodian service, companies like Goldman Sachs and Northern Trust. We are also waiting for ETFs to be approved by the SEC that could likely be accepted next year. Recently we have also seen the news that the world most significant stock exchange operator, ICE, is created a company that is called BAKKT, to make cryptocurrencies mainstream. These events could trigger the new bull market!
That being said, a common misunderstanding of investments in general and not least with cryptocurrencies is that past performance guarantees future results. We could see the price surpass the peaks in December, but it is also possible that the valuation will be lower. The crypto space is highly volatile and speculative which is why it is wise to look at how much billionaires are allocating into the crypto space and follow suit.
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