This blog covers the general topic of financial markets.


Crypto as a diversifier

first posted: 2020-04-30 12:55:56.151531

Summary

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

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. img

Ethereum performance

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. img

Monero performance

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. img

ZCash performance

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. img

Best 3 performance

We see that creating a diversified, risk parity portfolio results in very good results. img

Cost of including ZCash

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Crypto as a Diversifier to the SP500

Diversify with Bitcoin only:

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Diversify with a Good Crypto Basket:

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Diversify with an Imperfect Crypto Basket:

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Crypto and Precious Metals as Diversifiers to the SP500 -- need for timing

Diversify with Gold and Crypto:

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Diversify with the 3 Precious Metals Crypto:

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