The cryptocurrency elephant in the room

Ran Duchin, David H Solomon, Jun Tu and Xi Wang

Review of Finance, 2025, vol. 29, issue 6, 1721-1767

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.

Keywords: cryptocurrency; bitcoin; Bayesian portfolio theory; portfolio choice; non-participation; beliefs; investment frictions (search for similar items in EconPapers)
JEL-codes: C11 E42 G11 G41 (search for similar items in EconPapers)
Date: 2025
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