Crypto as a diversifier
This rather long article is structured as three sections:
- Crypto on its own: a bumpy ride, where we review the historical performance of Bitcoin, and a basket of good Cryptocurrencies.
- Crypto as a Diversifier to the SP500, where we review the diversification that a small allocation to crypto can bring to a convention portfolio
- Crypto and Precious Metals as Diversifiers to the SP500 -- need for timing, where we review the performance of a portfolio featuring precious metals as well as crypto.
Crypto on its own: a bumpy ride
Reference date is Jan 2015, except for zcash whose quote start in Dec 2016.
In the following section, we will review the performance of:
- Bitcoin (BTC), BTC is the first cryptocurrency first proposed in this anonymous paper, is first in market capitalization despite not being anynomous per se, and being expensive to transact, due to its success
- Ethereum (ETH), a versatile smart contract enabling token, this is the second most important crypto
- Monero (XMR), a token designed to improve transaction privacy
- Cash (ZEC), a token designed to ensure privacy by using zero-knowledge validation
Bitcoin was the first one to rise, and other cryptos followed.
Bitcoin performance has a longer performance history, and was very popular in 2013-2014 when the first high profile fraud with Mount Gox in Japan suddenly destroyed the confidence in that currency.
Ethereum was long a low value coin. It suddenly gained in value during the BTC bull of 2017 as ETH became the silver of BTC's gold. Back in the days of Mauve papers and Caspers, ETH was trying to increase transaction throughput and cost.
As monero grants privacy, it is useful and therefore there is justification of its value increasing. There are rumors that the privacy is too good and governments may want to forbid it.
A coin that sounds good in theory may not succeed. I am not sure why ZEC was not adopted more widely. It might be because the ZCash consortium reserved a large founder share to themselves, and nobody wants to throw in good money after bad. In November 2016, I decided to invest in cryptocurrency for fun. so I bought a ZEC mining contract with Genesys Mining for $2000. They would mine for me for one year. I could have bought 2.5 BTC for that price. I forgot to setup a wallet, and their IT just 'lost' the result of my mining 10 month later. I was never able to recoup my investment. With Crypto, you need to be very careful about execution, and investing in a lesser known crypto might result in your losing much compared to a BTC investment. V Butalik mentioned that zk-snarks would be implemented as an ETH add-on.
Best 3 performance
We see that creating a diversified, risk parity portfolio results in very good results.
Cost of including ZCash
Crypto as a Diversifier to the SP500
Diversify with Bitcoin only:
Diversify with a Good Crypto Basket:
Diversify with an Imperfect Crypto Basket:
Crypto and Precious Metals as Diversifiers to the SP500 -- need for timing
Diversify with Gold and Crypto:
Diversify with the 3 Precious Metals Crypto: