Crypto is probably a bad investment!

April 25, 2022 – If you remember my April Fools Day post from a few weeks ago, I poked fun at the proliferation of new crypto coins. Most of them are scams. But what about the mainstream crypto coins, like Bitcoin, Ethereum, etc.? Are they a good investment? What’s not to like about a 100%+ annualized return in some of the crypto coins between their inception and their 2021 peak?

Well, those returns are “water under the bridge”. What matters to me today is the outlook for the crypto world going forward. In today’s post, I like to go through some of the reasons why I believe going forward, crypto looks like a sub-par investment. I currently don’t invest in crypto and I don’t think that anything more than a few % of the portfolio seems prudent. Let’s take a look…

Just to be sure, cryptocurrencies had an amazing run!

To pay respect where respect is due, let’s just get the obvious out of the way: cryptocurrencies had very impressive returns. I downloaded the crypto return series I could quickly retrieve from the web: the S&P Cryptocurrency LargeCap Index and three individual coins: Bitcoin, Ethereum, and Litecoin, with the data coming from the St. Louis Fed “FRED” database. In the chart below is the cumulative (nominal) return since 2017. (Note that the S&P Crypto index only starts on 2/28/2017). The cryptocurrencies had spectacular returns. Ethereum with 360x, Bitcoin at about 41x, Litecoin at 24x, and the Large-Cap crypto index with 20x (though with a slightly later starting date of 2/28/2017). I had to display the y-axis in logs because otherwise, you wouldn’t even notice the S&P 500 stock index and the 10-year benchmark bond index (Source: The S&P 500 merely doubled in value (and that’s not even CPI-adjusted), and the 10-year Treasury Benchmark bond index is essentially flat over the 5+ years.

Cumulative nominal returns since 1/1/2017. (Crypto LC Index since 2/28/2017). Sources: SPGlobal, St. Louis Fed/FRED

A caveat: those higher returns came at the price of a lot more risk!

Even the spectacular and sky-high past returns look a little bit more down-to-earth when factoring in the risk you have been taking with the crypto investment. In the table below I display the annualized return stats – annualized return, annualized volatility (= monthly vol times sqrt(12)), and the Sharpe Ratio – and again compare and contrast them with the S&P 500 and 10-year Treasury benchmark bond returns. I display the results for three different time periods: 1) the entire interval since 2017 and the pre- and post-pandemic period.

Average annualized returns for crypto assets were in the high double-digits and even triple digits while the S&P 500 (TR) returned “only” about 16.5% since 2017. Nominal bonds only 2% until the end of March 2022. But the cost of double and triple-digit returns is the double and triple-digit risk inherent in the crypto market. And due to the extraordinary volatility numbers the Sharpe Ratios, i.e., the risk-adjusted excess returns over a risk-free benchmark, look not too different from the S&P 500 over the 2017-2022 time span. Ethereum and Bitcoin did a little bit better than the S&P 500, especially during the second half of the sample. Litecoin did worse than the S&P 500.

Return Stats. Sources: SPGlobal, St. Louis Fed/FRED. Notice that the monthly Crypto LC Index starts on 2/28/2017.

The crypto return engine started sputtering in 2021

Also evident in the cumulative return chart: all assets have been under pressure since late 2021. I am not saying that a temporary breather like we’ve seen over the last 6 months is a dealbreaker and automatically makes crypto a bad investment. Heck, stocks and bonds are going through the same phases all the time, including right now. What’s a bit more worrisome is that while stocks are holding up OK right now (a drawdown of about 10% as of April 25, 2022), the two major crypto coins are down 40% (and so is the large-cap index) and the smaller Litecoin is down 70%. Ouch!

Drawdowns from the most recent all-time-high. All returns are nominal.

What’s more concerning than the 40% crypto drawdown is that crypto has also become a lot more correlated with equities, which brings me to the next point:

Crypto has become “Equities on Steroids”

Occasional drawdowns shouldn’t be too much of a concern if that asset is uncorrelated with the rest of the portfolio. And for the longest time, that was certainly the case with the cryptos. But if I calculate the correlations over the three samples again (full sample, 2017-2019, 2020-2022) we notice that the correlation between the crypto assets and equities has noticeably risen, see the table below:

Correlations of monthly crypto returns and monthly S&P 500 total returns.

I can also confirm that the higher correlation is not merely due to the 2020 pandemic volatility. In the chart below, I plot the 12-months rolling correlation with equities. The strong correlation still holds up after rolling out the pandemic bear market. Anything with a market cap approaching $1t will start having some correlations with the business cycle and other risky assets!

12-months rolling correlations with the S&P 500 TR index.

Even worse than the correlation, the “betas”, i.e., factor model regression slopes of the crypto returns vs. the equity returns have been substantial. In the table below I display the factor model regression results, i.e., regress crypto (excess) returns on (excess) returns of stocks and bonds. In the second part of the sample, the index and all three coins have substantial and significant beta exposure to the stock market. For example, the 3.25 equity beta and 1.81 bond beta for Ethereum signal that this coin behaves close to a 3.25x leveraged equity plus 1.81x bond portfolio. But I also concede that in addition to the factor exposure, there are significant intercepts (alphas) in all of the coins. Even significant in the case of Ethereum. Though I doubt that Ethereum will keep paying an 11.7% (monthly!) excess return over a 3.25x equity portfolio forever!

Regressing excess crypto return on excess index returns. Slopes on the S&P 500 became significant in the second subsample, Jan 2020 to Mar 2022. Significant t-stats (|t|>1.96) in green.

But does this all mean that cryptocurrencies are a bad investment? Not necessarily. It depends on the outlook for crypto returns going forward. This brings me to the next section…

What are appropriate expected returns for cryptocurrencies?

If we believe that Bitcoin and Ethereum will again return 127% or 300% annualized, respectively, over the next few years then we’re done. No analysis is needed, then. But I think we can all agree that this kind of run cannot continue forever. With a current crypto market capitalization of $1t, it would only take a few more years before crypto assets are worth more than everything else on earth. Herb Stein’s law comes to mind.

So, what would be an appropriate expected return for the crypto assets? Well, just purely from the beta exposures to the stock and bond market index data, we could set the expected return of the crypto-assets the way you’d do in any other factor model application. For example, if Ethereum has an equity beta of 3.25 and a bond beta of 1.81, then the expected excess return is the beta-weighted sum of stock&bond returns, though adjusted by the cash rate for the portion of the total beta exceeding 1.0. That’s because if you invest in stocks or bonds on margin you have to account for the margin rate and subtract that again.

Then, if we calibrate the inputs as:

  • Stock expected returns 8% (3% inflation plus 5% real return),
  • 10-year Treasury bond expected returns 3%,
  • and the cash/money-market rate as 2.5% over the next 10 years,

… then we get the following expected returns:

  • Bitcoin: 14.5%
  • Ethereum: 21.3%
  • Litecoin: 19.2%
  • S&P Large Cap Crypto Index: 16.1%

So, even without including any additional alpha, these are very impressive expected returns. If we assume a current market cap of $1t in the large-cap crypto market and a 16.1% overall index growth, then we should expect almost $4.5t in market cap in 10 years. Pretty impressive. With those expected returns, what kind of crypto portfolio weights can we justify? That brings us to the next section…

Adding Crypto in an “Efficient Frontier Analysis”

With the variance-covariance matrix constructed from the post-2020 return data and the forward-looking return data, we have all the tools necessary to construct efficient frontiers with and without crypto assets. I start with the traditional assets only (stocks&bonds), then add the SP Global Large-Cap Crypto Index, and then all four crypto assets (index + 3 individual coins). The efficient frontiers are in the chart below.

Efficient frontiers with traditional and crypto-assets. Assuming historical (2020-2022) Variance-Covariance matrix and calibrated expected returns.

A technical note for the finance purists: The efficient frontiers should stop at the min-vol portfolio and not continue below in the south-easterly direction. Lowering return and increasing risk is clearly not efficient. At this point, I leave that portion, but normally I would plot that “inefficient” as a dotted line. The charts were made with Python instead of my usual Matlab/Octave, so please bear with me

I can also look at the portfolio allocation for different expected return targets, see below. Crypto assets don’t enter the portfolio until about 5.3% expected return, and even then we only add them very slowly. Only for 8.75% and higher target returns would you start adding the crypto assets aggressively. That makes perfect sense because you can get only a max return of 8% from the traditional asset mix. But if you’re targeting any kind of expected return similar to a 100% equity portfolio, there’s very little crypto in the portfolio. Maybe a 4-5% share.

Optimal allocation along the efficient frontier.

Of course, the crypto assets are indeed useful if you’re interested in going beyond the “normal” range. But how much of the “interesting range”, say, 20% and less volatility, is really improved by the crypto assets? Let’s zoom in and look at the chart below. Not much of an improvement. The efficient frontiers with crypto are essentially right on top of the green parabola that uses only stocks and bonds. Crypto doesn’t help you if you demand a portfolio with a volatility less than a 100% equity portfolio.

Efficient frontiers with traditional and crypto-assets. Assuming historical (2020-2022) Variance-Covariance matrix and calibrated expected returns. Zoomed-in.

What if we increase the crypto expected returns?

The problem with any kind of portfolio optimization method, including efficient frontiers, is that the results are very sensitive to the expected returns we use. I don’t want to be accused of low-balling the expected return assumptions. Especially in light of the large alpha estimates in the factor model regression above. So, how about I slap on an additional 10% expected return to all the crypto-assets. Maybe there’s an additional risk factor that I’m not capturing and the 10% extra returns account for that. But a 25-30% annualized return seems unrealistic over the medium-term because I don’t quite see how the crypto market cap can increase by a factor of almost 14 over the next 10 years (1.3^10=13.79). So, under those unrealistic assumptions, crypto assets will indeed make a noticeable difference in the efficient frontiers, even in the sub-20% risk region. But I don’t believe expected returns are that high.

Efficient frontiers if we raise the crypto asset expected returns by 10 percentage points each.

I can also plot the weights of the various assets as a function of the portfolio expected return again. Targeting a 10% annualized expected return, you’ll indeed include about 20 % crypto-assets.

Asset weights if we raise the crypto asset expected returns by 10 percentage points each.

But again, I don’t find the expected return assumptions very realistic.

Risk Parity and Min-Vol portfolios

If you’re troubled by the way I calibrated the expected returns, there are also a few portfolio construction ideas that work entirely off of the variance-covariance matrix (VCV), thereby sidelining the expected return inputs. Min-Vol portfolio and Risk Parity come to mind. Can crypto assets play a role here? Well, let’s take a look:

Risk Parity targets portfolio weights to equalize what different asset classes contribute to the overall portfolio variance. By the way, there is nothing special about parity, i.e., setting the contributions all exactly equal. We can solve for any target risk contribution share. For example, if we want to use Stocks, Bonds, Bitcoin, Ethereum, Litecoin, then literal Risk Parity would be nonsensical because the three crypto-assets would then contribute three-fifths (60%) of the risk. Rather, I like to keep the contributions from the major asset classes equal. So I target the following splits:

  1. Traditional assets only, i.e, 50% risk contribution from stocks and bonds
  2. Add the Crypto Index, and each asset class gets a 1/3 contribution
  3. Add the three individual crypto coins: then each gets 1/9
  4. Add only the two major coins, and they both contribute 1/6 of the risk

I display the Risk Parity portfolios in the table below. We start with the well-known result that risk parity in a stock/bond world would necessitate a huge shift to bonds because stocks are so volatile. Adding the crypto assets we’d need about 4.42% to 4.67% of crypto-assets to capture 33.3% of the portfolio risk.

Risk Parity Portfolios. Using the Jan 2020 to March 2022 monthly return VCV.

Min-Vol portfolio. In the Stock+Bond world, you’ll end up with an 18% Stock and 82% bond portfolio. Adding crypto assets long-only that’s still the same, implying that you wouldn’t touch crypto-assets even if you had access to them. In a long-short world, you’d short the three individual coins but go long the broader crypto index. The net weight of the crypto-assets is just about -1%. In other words, you’d use the strong equity-crypto correlation to hedge out some of your equity risk through a net short-crypto position. Crypto isn’t useful at all in a min-vol world, but who’s really surprised about that one if these coins have a 100% annual volatility, right?!

Min-Vol Portfolios. Using the January 2020 to March 2022 monthly return VCV.

Seeking high returns and high risk? There might be a better way!

But what about the folks who are comfortable with higher risk if that means higher expected returns. If you’re still accumulating assets and you can use the Dollar-Cost-Averaging effect, then you can clearly ramp up the risk target and use crypto assets, while walking up the efficient frontier, right? True, but there might be a better way. As I wrote in a post almost 6 years ago, we could take the efficient frontier diagram, identify the Maximum Sharpe Ratio portfolio, and use leverage to expand the efficient frontier to the left. For example, in the base case scenario with the calibrated expected returns, the tangency point is at about 53% bonds and 47% stocks. No crypto assets are used in the maximum Sharpe Ratio portfolio. If we simply extrapolate along this tangency line we can reach points far superior (i.e., lower risk and/or higher return) than any of the efficient frontier using crypto assets. For example, with a 4x leverage (about 212% bonds, 188% stocks, and -300% cash), we’d reach about 13.1% expected return and 32.6% expected risk. Close to the Bitcoin expected return but less than half the risk of Bitcoin. Who needs Bitcoin, then?

Efficient frontiers with traditional and crypto assets. Assuming historical (2020-2022) Variance-Covariance matrix and calibrated expected returns. Tangency Portfolio line added. The markers represent the 0x (=100% cash), 1x (=max Sharpe Portfolio) and the 2x,…,7x leveraged tangency portfolios.


In the crypto debate, you often hear the crypto critics warning of the impending doom, while the crypto fans extrapolate the spectacular past returns into the future. Both sides of the argument are “conditionally correct”, i.e. if crypto is all just a bubble, then stay away. And if crypto keeps going up at 100% a year then that’s very attractive. But in today’s post, I wanted to show that cryptocurrencies aren’t that attractive even in the “intermediate case” where you assume that crypto assets have expected returns of “only” around 2x to 3x that of equities. That’s because crypto volatility is simply too high, coupled with a noticeable equity correlation.

The rationale here reminds me of my old post from 2017 (“This fund returned over 100% year-to-date. I’m still not buying it!“) with a similar flavor: an ETF had strong returns, but it still was not worth it. Because the volatility and downside risk, as well as the equity correlation, were complete dealbreakers. (and sure enough, just a few months after publishing the post, the ETF indeed blew up in February 2018, though I’m not necessarily predicting the same for the cryptocurrencies).

So, if you want to mix a few % of Bitcoin into your portfolio, be my guest. But I would not invest in crypto on a large scale. Especially not in retirement when volatility and drawdowns can pose a real headache.

So, take it for what this is: I’m just a personal finance blogger with an opinion and some technical training and tools to test my hypotheses. People may accuse me of being a crypto curmudgeon because I missed out on the great wave up. Maybe that’s true. People have a tendency to justify their past actions and past mistakes. But I hope that even the crypto fans have gotten something out of my work. Use my ramblings as a devil’s advocate argument. Can you convince me and yourself that my analysis is wrong?

Thanks for stopping by today. Looking forward to your comments and suggestions!

Title picture source: History Channel

151 thoughts on “Crypto is probably a bad investment!

  1. ERN, I’m concerned that you’ve strayed from today’s standard FIRE blogger advice. Most (previously) sane voices have said “Sorry I didn’t recommend crypto, that was reckless of me, you certainly should own a little bit…but it could easily go to zero.” I laugh every time I see this sentiment expressed, but am saddened by the madness of it. If you think it will keep increasing in value, great, go for it. If you think it’ll go to zero, don’t buy it. But to try to blend both sentiments together sounds foolish. Which you have avoided, good job!

    ps Also, whenever I see “It’s like ___ on steroids!” I run away.

      1. Hey, do you have any posts that explain what to do in a high inflation environment? Its hard for me to justify increasing my withdrawal 6% multiple years to account for inflation. Or just cap a withdrawal increase each year at 3%?

    1. ARCY,

      IMO the certainty expressed in your opinion that “to try to blend both sentiments together sounds foolish” is misplaced.

      No one knows for sure what will happen to any asset class. Being diversified in the face of uncertainty is sensible. And it’s even more sensible in the case of “fat tail” possibilities (read Taleb’s The Black Swan if you are unsure of the reference), which very likely applies to something like crypto.

      One can make a strong case for holding somewhere between 1% and maybe 5% of one’s portfolio in crypto even if you believed, for example, that in 10 years there was an 80% chance of crypto being down 90%+, a 10% chance that it was about flat, and only about a 10% chance that it was up 10x (1000%).

      I currently hold hold no crypto, but am thinking of putting 1%-2% of my assets into it for roughly the reason above.

      There are many things other FIRE bloggers say that I find maddening – mostly when they don’t understand retirement drawdown stuff one can learn from reading ERN – but saying re: crypto “you certainly should own a little bit…but it could easily go to zero” is actually quite sensible advice in the face of significant uncertainty.

  2. Hi ERN,

    Love the work and I’m also a Bitcoin enthusiast. I’m curious what level of research you’ve done on Bitcoin? Have you read books like the Bitcoin Standard and do you understand stock to flow dynamics of the algorithm aka the having cycles?

    I think Bitcoin has a place in a portfolio as small allocation because the Bond market is dead in real terms IMO. You are currently losing 5% in real terms on the 10 year and rates have to go up which will cause the price to go down as well. Due to frivolous government spending inflation is here to stay and I doubt either party will stop anytime soon.

    All the other “crypto” I agree is a casino. Love to hear your thoughts on the Bond market and why you think it’s not broken.

    1. I haven’t read the specific book you mention. But let me say unequivocally that as a math geek myself I’m certainly in awe thanks to the amazing technology behind some of the crypto assets.

      But it doesn’t mean that a technologically interesting idea also has to be a great investment.. I seriously doubt that Bicoin can replace even 1% of all global money transactions. Hard to imagine there would be a crypto money standard.

      1. Not sure the goal is to replace money transactions.

        My take is Bitcoin is an asset and not currency. Can Bitcoin replace a VERY small percent of global assets (real estate, gold, stocks, bonds, etc)?

        1. If Bitcoin replaces a very small share of gold (similar idea, no real use, no dividends, no profits) then it’s already fairly valued or even overvalued.
          Also, gold at least has some industrial uses and can be used in jewelry. Bitcoin is just completely imaginary.

          1. I usually agree with you, ERN, on matters of substance. But saying “Bitcoin is just completely imaginary” is roughly akin to saying software and music and ebooks are just completely imaginary. Whether technically accurate or not, so what?

            Relative to USD and Japanese yen and Swiss franc and theEuro, the point you’re making is valid enough, as those fiat currencies are backed by the taxing power of their respective country governments, most of whom posses the military force to ensure their taxes are collected, and each of whom has a track record of not *horribly* debasing their currency.

            But Bitcoin strikes me as less imaginary than the guaranteed long term buying power of the native currency of a substantial fraction of global population.

            Gold’s value has almost nothing to do with its industrial uses but lies in the fact that it cannot be easily added to (and so debased), combined of course with the “trust” that others will continue to value it.

            Bitcoin offers built-in openly inspectable methods to verify that it is not debased, among its other “trust” and verification values.

            I make no assertions at all about what fair value for Bitcoin is (I have no clue), but this one phrase is the rare instance to me of you sounding like a Luddite – which fortunately does not seem to apply to the rest of your analysis on this topic or others.

            Hopefully you can at least partly back off on this one small point.


            1. Bit coi and gold are both valued because there is limited supply. The problem I have with Bitcoin is that other crypto currencies can be created (and have been created) just as easily with some computer code. So, in that sense, it is imaginary and worthless. Music and software are not not worthless. They have copyright protection.

              I don’t want to get into a discussion on what the value of gold is based on. The marginal buyer may in fact be the industrial user. I cab’t show this and you can’t disprove it either.

              1. Saying someone can create another Bitcoin with new computer code is like saying anyone can start a new electric car company and overtake Tesla and anyone can open an online store and overtake Amazon.

                Bitcoin already has 1 million+ miners securing the network for its specific code. And unlike all the other cryptos, it’s not a security masquerading as a crypto. Its network effect has value and it can’t just be recreated out of thin air.

  3. Hi ERN,

    I think you made a typo when discussing the tangency point. Your exact wording was “in the base case scenario with the calibrated expected returns, the tangency point is at about 53% bonds and 47% bonds.” I think that should be 53% bonds and 47% stocks.

  4. The investment thesis for Bitcoin (specifically) isn’t so much its short term returns relative to USD, but rather the desire to hold some asset that isn’t someone else’s liability. Watching the western world freeze Russia’s foreign currency reserves was a great advertisement of this, since today’s ally could easily become tomorrow geopolitical foe. I’m looking at ~20% of M2 growth in the past 2 years, combined with a need to keep interest rates low to continue monetize our debt and keep a floor under historic P/E ratios, and in the event this blows up I don’t have many places to hedge myself. I agree there’s a strong current “risk on” correlation to equities, but my open question is whether it eventually can become uncorrelated. Seeing life insurance companies allocating small percentages to bitcoin was a very positive sign, in my opinion, given their long dated liabilities.

    In the chance we experience a Dalio-esque “Changing World Order” sometime in my investing time horizon, what other “hard money” asset is really available? Paper claims on a london gold bar, denominated in US dollars? Real estate that’s difficult to sell or move? I’m willing to put a few percentage into the very asymmetric potential upside of digitally scarce asset free from state control. If it goes to zero I won’t notice the haircut, but if it becomes a global settlement and reserve asset my descendants will certainly thank me!

  5. Few points which I’m not sure you mentioned in your analysis unless I missed it while skimming:

    One thing I didn’t see mentioned unless I missed it was, that you often can get 2-8% yield on Bitcoin & Etherium. If you add in this ‘dividend’ rate I imagine the analysis would change a bit? For example with FTX, I’m getting a net 6.5% yield. I’m pocketing an extra 0.0001 bitcoins daily. Alot of these yields are a bit higher with I guess what you might call ‘customer acquisition’ costs, but nevertheless, I don’t see this sort of yield disappearing completely anytime soon. Some platforms have higher, some have lower…

    Further, Ethereum once it completes the transition to proof of stake should allow the continuation of staking yield, which right now is like 3-6% depending upon platform you utilize.

    Stablecoins provide 7-10% on ‘crypto cash’ I guess what I consider or estimate at junk bond risk? Which are 1:1 backed by dollars. Wouldn’t this sort of yield, although ‘risky’ deserve a place in a portfolio at least a small allocation given daily yield? I have these at around now 4.5% of my portfolio now given decline in equities.

    3) Didn’t see mentioning of ability to partially minimize losses on downside by not having. a wash sale rule. Buy $1000 worth of bitcoin today, if it drops 5% tomorrow, you can sell and rebuy a second later and still have your position while locking in $50 off your taxes

    1. Good point. The question is, should that yield be added to the ~14-21% expected return. Or is it included already?
      Also notice that at some of the providers give you 8% yield just on a regular USD cash account. So I would consider a large portion of this yield merely a risk premium for non-FDIC insured firms.

      1. First I’m not a crypto expert and there is alot of things going on in the DEFI related spaces, but I guess I know more than average person but I think I’m directionally-ish kinda correct with what I say here.

        I saw recently some chart that supposedly quoted that the market is willing to support a 3-3.5% yield on bitcoin at least. I personally consider anything above that to be customer acquisition since many of these platforms use the yield to drive funds no differently than banks or what not.

        But in short I personally would update your numbers and assumptions – since they are indeed speculative in a new-ish area – to include these yields which I guess would drive up the expected return slightly and slightly dampen the volatility?

        The yield being high due to non-FDIC-insured companies…. I think is interesting, but you can still get substantial returns better or equivalent in some cases in DefI space. In this case it would come down to supply/demand, less middlemen like a bank of 100k employees in a sense suctioning off returns, and demand for that protocol/cryptocurrency. Institutional money also hasn’t flooded the system yet keeping some yields elevated.

        I suggest reading the bitcoin standard and picking that apart since that would be an interesting take.

  6. I have been a long-time reader of your work and found it sobering as well as thought provoking. I’m one of those “lucky” people who allocated a small percentage of their portfolio years ago and now has a substantial portion of my holdings (largely because I made it difficult to spend it so it just accumulated to at one point >70% of my portfolio).

    While I agree the prospects of crypto cannot be the same as they have been over the last decade, and are still wildly volatile, I think this analysis is lacking the inclusion of cryptos most recent innovation DeFi. As pointed out above by Jack, the buy and hold strategy is no longer the only strategy in this space. There are a variety of methods to increase returns (particularly in DeFi): Lending protocols (Maker, Aave, Compound, etc.), Margin (dydx), Options (Opyn, Ribbon, etc.), Liquidity Pools (Uniswap, Balancer, etc.), and Staking (Lido).

    While I think the age of buying and holding crypto as a rational strategy is approaching its end, I think the access and utilization of these protocols opens up a variety of investing strategies that are usually somewhat unaccessible, or require large upfront investments that many people do not have.

    For example, I was always interested by your articles on Put Selling option strategies and I had at one point investigated doing that on my own and I found the monetary commitment to make it worthwhile a bit daunting. I came across Ribbon which offers both covered calls and put option selling for crypto coins like Eth.

    A 15-20% return on selling out of the money put option contracts collateralized by stable coins (coins that are targeting a value of US dollars often through Fiat reserves, though some algorithmically) is one of the investments I have made using Crypto. Largely because I read your work on it and felt comfortable with the underlying strategy.

    If you are interested in writing a follow up article including some of these strategies I am happy to serve as a resource of what is out there.

    That said I appreciate your articles. I’ve always wondered, but don’t have the skills how to effectively model using these protocols, so I have to trust my financial judgement in lieu of that.

    1. The DeFi yields look pretty attractive. But they are likely a huge risk premium for forking over your money to unregulated and non-FDIC-insured player.

      I obviously like the put writing strategy. But unlike the S&P 500, I don’t see any fundamental value behind most of the crypto coins. How do you handle the downside skewness? Do you have some numbers you can share on what implied vs. realized vol figures would be? What’s the premium per week?
      I have a track record of selling puts that older than cryto coins. Not sure I can trust the crypto coins puts to perform as well as the SPX options.

  7. Hi Ern,
    I find your approach to crypto somewhat interesting, since it does not attack the basic validity of crypto, but addresses the investment thesis on the basic assumption that crypto is an “asset” (which it is not, if you ask me). Therefore: interesting article,

    1. Stephan,

      If you own any crypto, than the crypto you own is an “asset” of yours. Crypto may or may not *also* be other things as well (“investment”, “speculation”, “currency”, …)

      The same is also true of gold.

      The same is also true of bonds

      The same is also true of cash in USD.

      I’d be curious how you explain/justify that crypto – of for that matter anything else with a price (meaningfully) above zero – is not an “asset” if owned.

  8. I’m a full-time digital assets lawyer. Others have mentioned staking, lending, yield farming, liquidity pooling and other DeFi yield generation techniques unavailable in TradFi (but not mentioned in your critique). To me, the choice between holding bonds and staking widely-held Layer-1 protocol tokens is an easy choice. And this is why TradFi lenders and banks are up in arms: They lose.

    There also is what Chamath P calls the “shmuck insurance” aspect of crypto: If the USD goes the way of all fiats, do you not want to hold its most likely replacement? Consider that in choosing to buy fire insurance, you need not expect fire, only the risk of fire.

    Thanks for covering this topic.

    1. I don’t hold my money in dollars. I don’t know anyone who does.
      My investments are *denominated* in dollars. Its not held in $100 bills under the mattress. If the inflation rate stays at 8% for the next 100 years, then all my equities and real estate assets will also appreciate and make up for that.

      1. …but in fairness to the argument, the bonds that you often “advocate” in portfolios and use in your analyses (even though you hold almost none in your own actual portfolio) would indeed lose most of their value in this scenario, and continual rebalancing into bonds would cause even more losses.

        In other words, crypto may not be “fire insurance” against fiat/inflation for equities and real estate, but it may well be for bonds and even potentially for gold.

        [if it matters, I currently hold no crypto, but am thinking of buying ~1% crypto as just this kind of insurance/hedge]

        1. Sure thing. Bonds simply scale down the vol and provide a little bit of diversification with equities (correlation has been about -0.3 over the last few decades).
          Also, during normal times, 10-year bonds have yields/returns a little bit above inflation. While not an explicit hedge against inflation (would need TIPS or I Bonds for that) then should still slightly beat inflation on average.

          1. But we weren’t talking “normal times” but rather your “8% inflation for the next 100 years” scenario. And in that scenario for the next 3-10 years, anyway (the major SORR period), bonds will do terribly, and for the most part any negative correlation with stocks will only come from those periods when stocks do well – and thus do investors little good. Investors with large bond allocations would be hurt badly.

            And while none of us can predict the future, “8% inflation for 100 years” is one case I would say with enormous confidence that Bitcoin (for the next 10 years) would be a better investment than bonds.

            I’ll make no predictions for relative performance the remaining 90 years! 🙂

            1. I certainly agree that the realized 10-year CPI might be a little bit higher than the 2.85% or so currently inherent in the TIPS vs. Nominal term structure. But 8% is a stretch.
              Well, there’s a futures market where you can put money behind that bet. 😉

      2. Cash is USD in every allocation I’ve seen. Banks depend on deposits, which are claims to USD. Money market funds, likewise. So of course the banks and the money funds are opposed to yield-bearing crypto, which is at least 600 bp superior (much more for those who know what they’re doing in crypto).

        Bonds are not cash, but their yields are so poor that they might as well be. Every allocation that I’ve seen on this website includes some bond component (except for the 100/0 allocations of course).

        Crypto is not suggested as an alternative to equity or real estate, but staking, yield farming, liquidity pooling, etc., are rightly suggested (in my view) as alternatives to bonds and maybe cash.

  9. Whenever people talk about crypto they seem to never talk about the energy consumption. It is a serious issue and a big reason to question its scalability and whether it can truly go unregulated

    1. Good point. I mean gold needs to be stored in a safe location. With guards at the door at Ft. Knox and the FRB New York. But the drag can’t be as bad and as environmentally dangerous as the crypto energy consumption.

    2. Crypto uses about 0.004 of global energy output, and the percentage is declining as proof of work protocols lose ground to proof of stake protocols. There, you have it. I’ve “talked about energy consumption.” And as all can see, it’s a trivial issue. It’s a red herring.

      1. “The report states that each Bitcoin transaction consumes 1,173 kilowatt hours of electricity. That’s the volume of energy that could “power the typical American home for six weeks,”
        Another recent report states energy consumption is 0.5%. Not .0004%.
        It would be better for us all if you are correct. I hope the crypto minors will find a less energy intensive protocol.

        1. 0.5% is quite substantial.
          I also believe that it’s not 1,173 but 1.173kWh
          (which is still too much!!!).
          Sometimes the Europeans have the “.” and “,” mixed up when reporting numbers! 😉

          1. No, 1173Kwh would be ~correct (the number comes from a top google result on searching for “energy usage per bitcoin transaction” … not sure on the validity of the number itself).


            This Harvard Business Review article brings up another point, which is not all energy generated by power producers is utilized by the grid. Various power companies have proposed or are in the process of establishing crypto mining operations on site at baseload generators. That way there would be an arbitrage of sorts between the futures power prices, spot (can vary output for this), and whatever applicable crypto(s) valuations.


            1. This is a quote I found:

              “This process also takes an immense amount of time: Upwards of 10 minutes per Bitcoin transaction. Other digital transactions, like those powered by Visa, take less than a second and use roughly 1/500,000 the energy because they rely on a centralized authority to verify transactions.”

              1173kwh would cost around $100 where I live. $300 in the People’s Republic of California. Are you sure it costs that much? I don’t care about what someone on Google says. It doesn’t pass the smell test.

              1. I have no idea if that number is correct (why I mentioned it was a top google result… grain of salt and all). That’s why I’d put more stock (personally) into the Harvard Business Review article as it indicates that number includes the energy usage for mining as well as transacting.

                The numbers don’t pass the smell test for transactions but aren’t stupid-far-off for mining. For example:
                3200W power supply at 80% capacity = 2.56Kwh/hr
                1173/30/2.56 = ~15.3 hrs/day usage

                The 3200W power supply seems excessive but isn’t too far off most higher end set ups:

                Again, this is hardly academically rigorous or comprehensive in nature but just as a back-of-the-napkin calculation…

                1. I am not a crypto expert. Like ERN, I still think the (high but not ridiculous) 1.1 kw hour is by far the more reasonable estimate.
                  That said, it simply must be the case that the reason for the high amount of energy quoted as consumed for transactions has to do with the distributed nature of bitcoin/crypto.

                  I.e. it *cannot* be referring just to the cost of compute/energy on a single computer for the “upwards of 10 minutes” of Bitcoin transaction time, but rather to the many (globally) distributed computers *all* processing the same transaction.

                  This is *somewhat* different from how mining is done.

              2. People’s Republic? This is distressing. Your work is too valuable to alienate people this way. Please don’t do so.

                1. Chill out. It’s a joke. In light of the amount of taxes I’ve paid in into the utterly mismanaged state of California between 2008 and 2018, I’ve earned the right to do so.

      2. 0.4% is still substantial for a payments system that currently can’t handle more than a tiny fraction of all money transfer. I don’t think that the energy needed to send electronic payments via ACH eats up that much energy, even though the ACH traffic is orders of magnitude larger than crypto.

  10. I don’t have the data, but I’m sure I’ve read that the energy consumed by (obsolete) banks and brokers dwarfs the energy consumed by miners. All those ATMs, not to mention branch offices.

    Also, as noted, PoS is blowing past PoW. PoS uses very little power compared to PoW. And hydro energy resources (and other renewables) are increasingly being used for mining in the US.

    Thanks for the healthy discussion.

    1. I explicitly do not agree with many of SECLawyer’s other statements, but on the issue of energy consumption for Bitcoin (alone), he makes a good point.

      See this HBS article “How Much Energy Does Bitcoin Actually Consume?” for more details:

      Energy that comes from hydroelectric power deep inside China that has virtually no other practical uses for it should not in any moral/economic sense “count against” crypto. And yet per this article apparently Chinese crypto energy is about 50% of all crypto mining during the wet season season.

      And even if crypto is in many senses less “necessary” for those of us living in rich, (relatively) free Western countries, and no doubt gets used by international criminals, the ability for folks who live under dictatorships to be able to shield, protect and get their assets out of those countries is surely a global public “good”.
      The fact that Communist China is supplying a fair fraction of the energy to support it is in a way a delicious reversal of Lenin’s “the capitalists will sell us the rope with which we will hang them” idea.

      1. Good point. I never knew that mostly Chinese nd Scandinavian hydroelectric power are used for mining.
        A few objections, though:
        1: I’m less worried about the energy used for mining. How much energy is needed to (eventually? hopefully?) replace any meaningful share of ACH transactions?
        2: hydro power is currently sold from the large dams in WA State all the way to California. There is a cable to transport electricity from Norway to the Netherlands. Every kWh we waste on mining might have been transported elsewhere to replace pollution from fossil fuels.

        1. I’m not an expert in crypto. I have no answer for 1. other than pretty positive wouldn’t be done as Bitcoin transactions.

          I’m not an expert on energy, either, but I know that it is not easy/cheap to have the infrastructure to send electricity long distances. So above I didn’t refer to all hydro, but specifically hdyro deep inside China hinterlands which per the article cannot easily be transported and used elsewhere for other purposes. So most of that energy is not “wasted” at all, using any reasonable definition of that term.

  11. ERN, there is an element missing from your analysis: HACKS!

    If an average investor decided to put their money into cryptocurrencies in, let’s say, 2017, and they wanted to diversify brokerages / wallet services, then they would have opened equal-sized accounts on dozens of websites trading cryptocurrency. At least some of these sites were destined to be hacked in the next 5 years, and those accounts would have experienced negative 100% “returns”. Investors have lost billions of dollars worth of coins this way. The high positive returns from the accounts that weren’t hacked are offset by the high negative returns from those which were hacked, and this would dramatically lower the realized return on the portfolio. This scenario still exists today, as evidenced by the continual stream of headlines. There is no recourse.

    We can’t hand-wave this risk away, because the alternative is to keep a physical hard drive that can be stolen, lost, or damaged. The odds of those events happening are fairly high when we’re talking about a platter drive, USB stick, etc. To presume we would have picked the right websites to invest through is the same cherry-picking fallacy as talking about buying Netflix when it IPO’ed.

    Indeed, there’s a very good chance a lot of currently operational, legitimate-looking, and popular cryptocurrency trading websites (isn’t it funny how we call them “platforms” as if that’s more sturdy-sounding) are in fact Ponzi schemes run by insiders, and the only reason they haven’t collapsed yet is because there’s never been a run on cryptocurrency. When an insider leaves a software bug for himself to exploit, then he gets away with it – period. These guys know tricks the FBI has never heard of. It’s the perfect crime, which means it is probably more pervasive than any of us think. That means a lot of the paper gains people are bragging about may be a mirage.

    1. Yes! That’s a concern. I mentioned that in my old post:
      (Section “The flipside of payment finality: fraud, hacks, loss of Bitcoins”

      It’s a huge concern. Just a small chance of a -100% “return” is a real headache. Maybe this risk will go away as more mainstream players, including, for example, BNY Mellon (my former employer, world’s largest custodian) will get into the business.
      And also rest assured, if/when the mainstream banks get in, there will be no more 3.5% extra yield on Bitcoin! 😉

  12. Love this article! I’m only crypto curious myself having a low single digit commitment in my portfolio. If it were to stablize in the future and offer an inflation hedge like gold I would become more interested.

  13. Lotsa crypto hating here by folks who plainly don’t know much about crypto. We call it FUD. Example — the use of USD in criminal enterprise dwarfs the use of crypto for crime, but you don’t mention that. And heaven save us all from the services sold by money management firms. I agree that Bitcoin provides no services, nor do the dollar bills in my wallet, but clearly you know little about DeFi products and services. There are literally 10,000 traded token pairs but you chose to talk about the 1st 3 ever. A column that talks about long-only positions in BTC, ETH and LTC — why LTC? — while ignoring all of DeFI — is bound to result in irrelevant findings (even if they are correct ones). Like discussing the Ford Model T while ignoring Tesla in a discussion about cars.You do realize I hope that the richest man in the world under age 30 is a crypto entrepreneur, and I’m quite sure he didn’t achieve that by holding BTC, ETH or LTC long only positions in a hot storage wallet that could be hacked. Two other inconvenient facts for you: Basically every major university endowment now holds crypto. And basically all the most successful hedge fund managers now hold crypto. Cheers!

    1. It’s not hating. In fact, you’re the one calling me names. And I’m not Elmer Fudd, I align much more closely with Yosemite Sam.

      And another sign of you being the hater: you conjure up conflict where there shouldn’t be any. Sure, endowments now hold crypto. Most of them less than 4%, as I endorsed. Because endowments are run by folks who – unlike you – understand portfolio theory. People who run endowments usually have the CFA charter (just as I do) and they know their craft.

  14. FUD refers to “Fear, Uncertainty and Doubt,” not a cartoon character. “No-coiners” spread “FUD,” sometimes because they missed out, other times because they work for (or retired from) a bank. Ask anyone in the crypto industry and she’ll tell you this, whether or not she holds a charter. So you see, there was no insult, though you are spreading FUD.

    I do not hold a charter (many of my clients do). But I know that in an academic debate, when one side makes several significant points and the other side avoids them all in reply (e.g., criminal use of an asset, no consideration of DeFi products, services and yields), the first side wins by default.

    Since you say you are not opposed to crypto, I suppose we should expect you to retitle your column something like this: “Crypto is not the only asset class to invest in. Keep it below 5%.” agree with that, actually, except for crypto pros. But I won’t wait for that correction because we both know that you get more clicks by trashing crypto than in supporting it.

    I enjoy your columns and have learned a lot from them, FWIW. Respectfully, I believe you should update your understanding of crypto before you go there again.

    1. Thanks for the FUD clarification. I suspected something like that. The Fudd vs. Yosemite Sam was more of a tongue-in-cheek.

      About the title: First lesson in blogging: find a catchy title. Ideally, something that ruffles (some) people’s feathers. Successful again.

      And by the way, here’s another issue where we agree: in my previous post, my concern was that Bitcoin might not be the final iteration. It could go the way of the PalmPilot. Not sure, what’s the iPhone equivalent. I might wait until the dust settles and we have a winner. Or winners.

      And another area of agreement: Hedge funds find fertile ground arbitrating the relative valuations of different crypto assets. Long-only seems way too volatile.

      About the criminal use: BTC is used less for criminal purposes because BTC is used a lot less overall. Do you have statistics on the % of USD vs BTC transactions used for criminal activity, relative to their *own* overall transactions?
      Do you have scientific #s about what fraction of owners lost BTC due to hacks vs. USD balances?
      See, Mr. lawyer, I can play that scientific/academic game, too. Because I published numerous peer-reviewed academic articles in top econ journals. The reason I didn’t address your issue is that it seemed so un-scientific and un-academic to compare absolute numbers of criminal use of USD vs BTC, when the lawful use of USD is so much more than that of BTC.

      1. I don’t have data on those issues, but I do have deep domain expertise from my seven-day-a-week crypto practice. To wit:

        1. Treasury FinCEN spends much more time policing USD crooks versus crypto crooks. I believe it receives something like 100X as many suspicious activity reports for USD transactions as for crypto transactions. And the US Government is getting quite good at tracking down crypto crooks because crypto holdings, or at least bitcoin holdings, are not anonymous. On the contrary, bitcoin transactions create immutable records of ownership, which can be tracked, and are tracked, resulting in seizures of stolen assets and arrests.

        2. Hacks are a problem, but mainly for careless investors. Careful investors use cold storage or else deal with platforms and custodians who largely use cold storage and are insured for the rest.

        These issues are worthy of some study. In my dealings with Washington and the crypto community and the general public, however, I have found that these issues are almost always raised as a smokescreen by people who basically don’t understand crypto and are looking for easy excuses to avoid the hard work of learning about it. I’m not looking at you, Big ERN, but it is fairly typical of no-coiners spreading FUD who are envious of crypto millionaires and who want to be told that they are right to remain ignorant. Rather like near-retirees who ask if it’s OK to “just wing it” or to “adjust my lifestyle if I need to” because they can’t be bothered to do the hard work of calculating a SWR.

        A recommendation: In future analyses (which I hope you will undertake, because your quant skills are so very strong), don’t use BTC, ETH and (the redundant and irrelevant) LTC as a crypto proxy, but rather use one of the crypto indices that have been created. There are several. Maybe use the S&P Crypto Broad Digital Market Index. BTW, the 5-year annualized return of that index is ca. 80%. The professionals do much better. I know one rather sizable fund that returned 17X last year. The year earlier, it lost 50%, but still I wish I had been invested in that fund the last two years. The extreme right-tail skewiness of crypto is the best reason to be net long in my view. It would be crazy to be net short.

        To be clear, I am a lawyer (and a law professor), not a financial advisor, and I would not recommend that anyone other than a market professional establish a net long position even as large as 5%. I do believe that staking, lending and other DeFi opportunities are superior to unsecured bonds; I view them as similar to income-producing real estate, and I’ve not been able to figure out where either such asset fits in an equity / alternatives / bonds / cash portfolio. Please do express a view on that if you have one. Or perhaps save it for a later column.

        Well, I need to go prepare for a lecture in Dubai. Despite 40 years of law practice, I am very far from “retired” because this field engages and challenges me so. Thank you for the engagement here.


  15. I notice you place 0 value on eliminating counterparty risk. The stocks in a brokerage account are difficult to bring into direct custody, meaning they are easy to seize for many entities in many cases. If the country collapsed faster than expected, there is no way to get this capital out if there’s a blanket freeze on withdrawals.

    There is no other asset that can be set up to completely eliminate seizure risk. You can set up multi sig, have 5 keys (long passwords called private keys that can be printed on steel dog tags with an engraving pen or stored on an encrypted microsd or kept in a Cold Card) and 3 are needed to sign a transaction, these 5 keys are spread across 5 continents so even if you wanted to under threat of death, you are literally incapable of making the transaction. This is more valuable than the monetary premium on gold. More mobile, more secure, much quicker and cheaper settlement- especially if using the lightning network, essentially a fully collateralized debit account with near free and instant settlement.

    Gold has a 12T market cap/20M coins=600K/coin if it matches and doesn’t surpass gold, despite being far more useful monetarily. A 17x from here without counterparty risk.

    Every 4 years, the supply created “flow” gets cut in half. This creates a supply shock that has consistently increased the price. The history is short but a 4 year cash cushion is far easier to bear than the 20+ common in stock markets.

    One question regarding stock market drawdowns, do the lengths increase if you track inflation using m2 growth rather than cpi?

    1. I hear ya. But if the USA collapses then so does the electricity grid. Bitcoin is of no use in a doomsday scenario.

      I calculate stock market drawdowns with/without CPI adjustments. I don’t think deflating returns by M2 is sensible.

  16. Any way you can talk about what’s happening in the market and not about things that don’t matter?

  17. I retired early from gains made in Ether – I sold 95% and bought shares with the profits but still hold enough to run a few of my own validators (staking nodes) – the income from staking is a nice constant, even if the price is anything but constant.

  18. Thank you for the article and for sharing your thoughts on cryptocurrency. I think this analysis is missing the bigger picture with Bitcoin in particular. No correlations have been increasing with equities in the last couple of years, the findings of your study are only valid if this correlation stays the same or increases, not if the correlation once again decreases in the future.

    For reasons that are outside of the scope of this reply, and which are outlined very nicely in the book “The Bitcoin Standard,” people are currently using the stock market, real estate, and other similar assets as a savings vehicle as opposed to a pure investment vehicle. While investing is fine, investments are not ideal savings because of their volatile nature. People use bonds to dampen this volatility, however with central banks taking on more and more debt, and the inevitability of fiat currency to continue to depreciate in value, Bitcoin is a superior store of value as a savings vehicle and is a superior money compared with fiat currency.

    Should people on a large scale come to accept Bitcoin as a superior form of money and store of life savings as compared with bonds, real estate, and stocks, then all of those assets will deflate and that value will accrete into Bitcoin, therefore making it actually quite a valuable investment for the future.

    1. Correction: “No correlations have been increasing” – > “Though correlations have been increasing”

    2. BTC correlation to basically all asset classes has been elevated and persistent since roughly 3/2020. Similarly it’s historical volatility has also been elevated since roughly the same point in time. However, it’s not alone pretty much all asset classes have seen a systemically higher correlation/vola and we are pretty clearly in a higher regime for both values in the market currently. So my question to you is: what about BTC as an asset class would indicate it’s corr/vola should drop in isolation without the broad market moving in the same direction? (BTW, the efficient frontier with, say, a 5% stake in BTC looks different in the pre 3/2020 regime vs after… mainly due to increases in vola with lower risk adjusted returns and increases in correlation to things like SPX, 10y t-note, etc). You may be right and BTC correlation/vola falls more than broad market ones do but I’m not seeing this with a statistical certainty.

      I’m not going to comment too much on the second paragraph’s point on “traditional” assets being used as savings vehicles (I mean if you’re going to invoke The Bitcoin Standard then let’s discuss it dang it :P)… I’m certainly not using these as “savings” and I don’t think I know anyone who does… they are an investment with well defined return/risk parameters and I have money there because I don’t want to miss on the opportunity cost of it sitting in cash or gold/whatever. Institutional investors liked BTC in part due to the lack of clear correlation with the broad market but how has that worked out during this bear market? Second, so people use bonds to dampen volatility of their “savings” vehicle but BTC is a better store of value?… I have 3 year rolling Yhang-Zhang volatility (this will show some of the inter day vola and is therefore biased higher than say close to close vola) anywhere from 60-75%. That’s much higher than anything in traditional asset space. So how is it a better store of value? It’s also got much higher kurtosis than SPX so the risk of cashing out low is pretty severe. Last, with regards to fiat currency decline… why is it inevitable? Likely, maybe(?)… but inevitable, not so sure. But let’s say it’s inevitable, if I buy shares of a stock like AAPL then I’m actually making a spread trade. I’m saying I believe AAPL will have superior returns and risk characteristics vs holding in cash. So I’m effectively long AAPL and short USD (ish). Maybe AAPL won’t continue to increase in value but there is still strong potential for dividend and earnings growth in the broad stock market and long term that would continue to make those traditional investments worthwhile. So I’m long traditional investments-short USD. If it declines I already have a bit of a built in hedge against that.

      Now, there certainly was a bit of a case for holding a small & well-diversified crypto portfolio in past regimes. But since 3/2020 and since the recent bear market that trend hasn’t continued. Thing is, even with BTC you really only have data with significant trading volume from roughly 2014 onward… that means it’s story is still being written. And this new chapter is not its best one. Maybe it returns to strong over-performance with low broad market correlation but that future is not guaranteed. Not with traditional assets having clear reasons for having decades of proof of strong growth and certainly not with the overall crypto landscape being unclear (where’s my low ER diversified crypto ETF already?!). To be fair, there is a possibility this is the start of a Nikkei-like decline in US returns but again,… what’s more likely to happen? Because I want to use that for where to park my money and my kids’ money for the next several decades.

      Last point, right now BTC (and all cryptos for that matter) trade like a commodity. If the proof of value is as a currency then what happens when that trading tendency shifts and it trades more like a currency? Will it become roughly range bound like most currency pairs are? Will it have to decline in value to become valid in changing currency basis or as a hedge? No proof exists that the value continues to go up once it’s accepted as a currency so if that is its fundamental basis for an investment then why is that a good thing as a long term asset?

      1. I love the thorough reply. Thank you. I’d like to address some of your points/questions.

        1. “What about BTC as an asset class would indicate it’s corr/vola should drop in isolation without the broad market moving in the same direction?”

        Bitcoin is currently an investment and its a speculation on its future promise. It’s currently so volatile because it’s uncertain whether it’s future will play out as supporters feel it will. As it gains a progressively larger market cap over time, it’s volatility will dampen.

        Why will its market cap increase? Because it’s a superior form of money. The best money that’s ever been invented. The reason gold served as money for so long is because regardless of how high its price went, humans could only dig a limited new amount of it out of the ground each year. Sea shells, glass beads, other metals have all been used as money in the past but because they weren’t as “hard” as gold, they didn’t stick around as currency. Bitcoin is mathematically designed so it has low inflation like gold. But gold was not ideal to use as money as trade grew internationally because its expensive to move, and here fiat currency shined, at least while it was backed by gold. Bitcoin fixes this because it’s as hard as gold, but it’s faster than fiat. Final settlement is within about 30 minutes. Throughout history, value has flowed from weak money to strong money, and bitcoin is the strongest money.

        2. Regarding investment as savings

        Anyone who invests in index funds is saving. They are saving their work energy and converting it into an asset that they can later spend. That’s by definition saving. If I want to retire in 30 years, I’m not going to save in USD which is guaranteed to lose its value by 2-10% per year. I’m going to save in stocks, bonds, real rate, etc…

        Before we went off the gold standard, people could actually save their money in their currency. They had comfort and security from this. Predictability. They didn’t have to worry about being forced to choose between saving into an asset that could decrease by 50% (stocks) vs buying debt denominated and paid back in a currency whose issuer is incentivized to devalue it year after year through inflation (bonds).

        Again, I realize that with its current market cap and volatility, Bitcoin is NOT ideal for saving. It is an investment and a speculation at present. If the world goes on a Bitcoin standard in the future to replace the gold standard of the past, then it would again uncouple from risk assets because it would then cease to be a speculation if it achieves that goal. The closer it gets to that goal, the less speculative and volatile it will become.

        3. If the proof of value is as a currency then what happens when that trading tendency shifts and it trades more like a currency? Will it become roughly range bound like most currency pairs are?

        Currencies trade closely because their common denominator is debasement. Their supply increases in similar amounts every year, so they trade roughly in sync. If you have one currency debase significantly more than others (ie. Turkish Lira, Iranian Rial), then they cease to trade in close range. Bitcoin is mathematically guaranteed to inflate by only a small percentage every year which slows down over time. Because a certain amount is lost every year, it’s probably even deflationary. By definition unless fiat currencies all start to disinflate in line with bitcoin, the value of bitcoin will rise in relation to them.

        I hope I addressed all of your points. Let me know your thoughts!

        1. Bitcoin is abysmal as a currency.

          It’s clear that it’s design was not ready for it to be adopted at a global level. The hard cap on transactions per second leads to exorbitant fees, and dramatically reduces its use-case for everyday transactions. The solution to this TPS cap is the lightning network, which throws out many of the tenets many die-hard BTC supporters rally behind (trustlessness and proof of work). Additionally, the lightning network has proven to be unsecure on many occasions and many believe it is fundamentally flawed

          Some blockchains/coins will be viable day-to-day currency eventually, but not BTC. it will be a different coin /coins designed from the beginning with the end-goal of handling a high volume of TPS.

    3. Disagree. The more mainstream BTC becomes the higher will be the correlation between macro trends and BTC. BTC will likely become even more correlated not less.
      But good luck betting on me being wrong. Since I wrote this, the SP500 is down 9%, BTC is down 26%. BTC is an equity asset class with 2.5-3x beta. As I wrote in my post.

      1. Please see my reply to Spacetimemorph above as to why correlations will decrease. Just because Bitcoin is a risk asset now does NOT mean it will stay this way. Golf and Bonds both have large market caps and are “mainstream.” Are they correlated with stocks? Again, your analysis is focused on what Bitcoin is, not what it may become, and that’s why it falls short.

        1. Right now BTC is neither an investment nor a currency. For a currency it’s way too volatile, probably around 10x the vol of most major currency pairs. It’s not an investment because it doesn’t create any value internally, the way equities generate profits or real estate generates rent. It will NEVER be an investment (by construction) but it can certainly become more and more like a currency. But at that time, it will also take on more of the return characteristics: lower risk and lower returns.

          But again: we will not know until we see at least 10 more years of returns. You will obviously put your money where your mouth is. But I suspect you will be sorely disappointed. BTC will be an asset class with 2-3x equity beta and likely very disappointing risk and return characteristics.

          1. As it stands currently, Bitcoin is a speculative investment because of the possibility for it to become a currency with a much larger market. The reason it will have good return characteristics when compared to Fiat currencies is that unlike Fiat currencies the supply of which increase many percentage points per year, Bitcoin has a fixed and steadily decreasing increase in its supply. By basic laws of economics, its value must go up against Fiat currencies as long as the Bitcoin Network stays in use. The network itself does not have a yield per se like traditional assets, but it has tremendous value in that it is able to facilitate transaction in a decentralized and trustless way.

            1. Currencies on their own don’t have any investment value. So, the speculation that BTC becomes something with an essentially zero or low return doesn’t strike me as much upside.

              The limited supply could in fact mean that eventually the price per BTC may indeed go up by the the rat e of nominal GDP. As I conjectured in the old post here:
              But an objection would be that due to the limited supply, why not just issue new crypto currencies then? Governments will have incentive keep the money monopoly and the signorange profits.

              1. Zoom out and think from first principles. If a currency is used by 2 people, then its market cap will be smaller than if it’s used by 5 people than if it’s used by 100, etc… As Bitcoin gains more acceptance and use, its value will go up due to increasing demand and limited supply. Its upside comes from this increase in demand over time. Once it reaches its full potential and is no longer speculative, then it will maintain steady state value and no longer be an investment with an expected upside.

        2. SS

          “your analysis is focused on what Bitcoin is, not what it may become…”

          Thank goodness ERN focuses on and analyzed what Bitcoin is now. I value that.

          Bitcoin is a speculation. ERN is likely – but of course, not definitely – correct that it will roughly trade like equities with a 2.5x – 3x beta for the near future.

          You of course *may* be right that Bitcoin will *eventually* become more or less a currency, and at that point be less correlated with stocks. We shall see. But right now Bitcoin is a speculation; whether it is a good speculation, nothing either you or ERN says/guesses about the long term future value of a Bitcoin can be stated with any high level of confidence.

          And to be clear, Bitcoin is unquestionably “more mainstream” now than it was 3-5 years ago, and yet equally clearly the correlation with equities has not gone down in the last 3-5 years. So even if you turn out to be correct in your belief that eventually Bitcoin will be a currency and will be less correlated with equities in the long run, it does not follow that Bitcoin will be less correlated with equities in the next 3-5 years as it becomes “more mainstream still”.

          Just please stop conflating “IMO Bitcoin is an excellent speculation with good risk/reward for the long term (and therefore I disagree with ERN’s opinion of whether it’s a good investment)” with “Bitcoin is (today) a currency” and/or the idea that “Bitcoin is overwhelmingly likely to continue to be highly correlated to equities with a > 2x beta in the near term, even as it continually becomes more mainstream”.

          1. Andy, I agree Bitcoin is more mainstream now than in the past, but currently it’s being traded among venture capital crowd and those more likely to speculate, hence its increasing correlation to speculative assets and funds like ARKK–for the time being.

            Again, I absolutely agree bitcoin is a speculation right now. 100%. I think it’s a good speculation, but not everyone does obviously. I’m betting on it, but not the farm. That’s what makes markets, right? Everyone buys or sells at their own price.

            Cheers all and let’s see what happens in 10 years! 🙂

          2. Agreed with almost everything except one item.

            BTC currently has a relatively low correlation with stocks. As a for instance, I have 3-year lagging correlation of BTC vs VTSMX of ~0.37 (Pearson coefficient). That’s still solidly weak correlation. If I take a look at a shorter timeframe, say 50 day, then I have a correlation of ~0.74. Both are currently rising. This is compared to a 3-year corr of ~0.05-0.06 just before the corona bear market (solidly uncorrelated). The pandemic market drop produced a step change in that 3-year measure resulting in a value of ~0.22. That rise in correlation has been persistent and increasing since. And I can use whatever equity metric to look at equities and come up with the same value.

            Couple things:
            1) Take a look at a correlation index like COR3M (CBOE implied correlation index). When a market crash occurs all assets tend to move towards a correlation of 1 wrt each other (including bonds, btw). So is BTC correlation to equities over the short term indicative of crash-mechanics that put it in line with the market or a new trend that will make it less attractive going forward (as a commodity)?
            2) Is institutional money (I won’t mis-use the term “venture”) going to be less likely to place money into BTC with low correlation? Remember if I short an ATM straddle as a retailer investor I can turn it into a fly by buying wings… institutional traders can have a basket of 1200 (or whatever) uncorrelated assets to hedge away market directional risk and don’t need the expense of buying wings for protection. So having something like pre-2020 BTC was nice… not so much 2022 BTC.

            1. I still think you guys are getting too cute with your numbers and correlations. Bitcoin has not been around long enough for these corrections to be useful for the future. You might as well be doing technical analysis.

              Big, respected names like Paul Tudor Jones and Ray Dalio as well as big institutions like Blackrock and Fidelity are all embracing bitcoin. Three COUNTRIES now have it as legal currency. All of this would have been unimaginable 2-3 years ago.

              Zoom out.

            2. Yes, agree. I have no idea how the -0.74 number was created. I trust my own calculations and they show a rising and significant correlation and beta.
              This higher correlation is certainly due to BTC and other crypto coins going more mainstream.

              1. Sorry just seeing this comment now. I was saying correlation (pearson) with a 50 day rolling window between VTSMX & BTC was about 0.74 (not negative!) on 5/23/22. I mean, enyat[sp] not negative symbol). [Don’t know if there was confusion from above but I thought I would clarify in case there was]. I saw based on your graphs above that this is roughly in line but maybe biased higher based on the shorter window length given the recency in the bear market that this statistic would encompass.

                I have been mobile but I was using a spreadsheet I’d been kicking around that had BTC daily prices and a few mutual funds (namely vanguard total stock, international, & total bond market: investor shares) daily prices listed on it. I had a time-sliced efficient frontier (used vba and the solver functions to maximize returns for a given volatility)… the correlations I looked at 750, 500, 250, 120, & 50 day rolling windows against the above asset classes using correl function with a nested offset to control the window length. For the rolling windows I would have (save for the N/A’s at the front end of the time series based on window length) a correlation for each day and used to see the rough distribution of correlations in addition to the graphing. All the windows show similar results when “zooming in” towards the shorter windows.

                Before I realized there might be an impression I think there is negative correlation (no way!), I went ahead and plotted put some of the same data (I have CQG as a data source but I used yahoo finance from quantmod -> getsymbols() as well) through an R-script to validate the excel spreadsheet and found similar conclusions there (using ggpubr & cor/cor.test). Interestingly, I can reproduce some of the bond results you had above using ^TNX for a 10y treasury yield but AGG and VBMFX both showed a decreasing correlation to BTC-USD through this year so that’s something I’m still chrewing on as I would have thought those two would show higher correlation to BTC. I didn’t plot beta regressions on these… just looking at the correlations. FWIW, even though you didn’t mention it VGTSX (REIT fund) vs BTC looks similar to the equities although I didn’t spend too much time there. [This is similar using Pearson as a method and using Kendall for non-parametric correlations; as an addendum I set use = “complete.obs” to handle the extra trading days in the BTC and ETH time series for the daily data].

                For equities I’m in agreement with the analysis in the article. Low-to-no correlation early in BTC’s and ETH’s lifetime and then following 03/2020 especially there was a sharp jump up followed by a rising trend in correlation until now. And yes, since you wrote this article things have been looking worse. I think it is relevant because there are some common talking points in the crypto community that A) crypto will show less correlation over time to other assets (even though it has been going up) and B) that volatility has been going down (even though along any estimator & window it has been steadily rising). This is aside from some of the Austrian-school-of-economics though processes that are displayed in “crypto-economics.” Even if it is rhetorical (IMO) it is relevant because how can someone objectively claim the opposite WILL occur when there is no data to support that claim?

                Anyway, final thought then I’ll go away: googling “how many bear markets” yields a bunch of different answers depending on source. It looks like there have been 25-30 bear markets since 1929 depending on whose defining it what way… but this is really the first official bear market for BTC. A) That isn’t a statistically significant set of data for any market to base forecasts/models on (for bear market analysis), B) a bear market can help define risk parameters (“what is the worst thing that can go wrong” is somewhat different than “what return can I expect over a future time period”). So to me, there is again re-stated relevance in looking at shorter timeframes and some of the recency in the market ytd.

                Thank you for the article and the website! It made some good vacation reading over the last couple-few weeks.

                1. All good points. Thanks for confirming that the correlation has been positive recently.

                  Regarding the bear markets, yeah people have different definitions. I collected 10 since the Great depression, plus the 2020 and the 2022, making it 12.

                  You’re right, BTC hasn’t gone through enough bear markets to know anything definitive.
                  But I’m pretty confident that studying 150 years of stock/bond/cash data gives you pretty statistically significant results.

                  But I see how people can argue that we should use fail-safe rates even a bit lower than the historical ones because we might not have seen the worst yet. But that would you make you even more conservative than me.

  19. Hi, Ern. Thank so much for the article and the SWR series, it is superb.

    The correlations are significant and do tell us something, I do not agree on what they do tell us though.

    I think it is fair to say that there are a lot of people that think that bitcoin is the hard money of the future. The narrative can go something like Gold 2.0; Bitcoin Standart; hedge against default of your government or hyperinflation without counterparty risk; or even hedge against Ray Dalio-style collapse of current world order with the dollar as a reserve currency. Whatever the precise line of reasoning, the actual behavior of such people is buing at any price until btc costs 1m$/10m$/never(or lower if the accumulation started when bitcoin was much smaller) maybe with some cashing-in on the way to change current lifestyle before the promised land of the heperbitcoinization.

    What the amount of such people currently is? The adoption rates that I have seen are all exponential without slowing down. Let’s say that there are 1m guys accumulating at 1000$ on average per month. That would be buy pressure of 30m$ per month or 1m$ per day. With 10s of billions in bitcoin trade volume it would be a blip. But, at the same time, right now the inflation of bitcoin in $ terms is at about 1m$ per day (6.25 btc * 144 blocks/day * 30k$/btc ~= 1m$). So, this unidirectional blip of 0.006% of trading volume can complitely change the inflation/deflation/scarcity structure of the asset. What if there is actually 10m accumulators buing 1000$ on average? The floating supply would be rapidly eaten away until supply shock comes and violently reprices the asset.

    And what is that rest of the 99.996% of trading volume? It certainely isn’t retail. I bet there is a lot of big money guys who don’t agree on what bitcoin is with the staking plebs and what it’s fair value is and what is even the appropriate framework of valuing should be used. For example, they may see it as tech stuff that obviously ought to trade like NASDAQ (also tech stuff) and lo and behold, it is (when these big money guys did start to trade it with that assumption)!

    If you take an asset price history and multiply it by an exponent, the correlation with the original price series will be super close to 1, but the return can be made whatever we want by changing the exponent we multiplied by.

    I look at the current market as bifurcated in these two distinct categories. The big money guys with fancy greek analysis making up basically all the volume and the insane guys raving about hyperbitcoinization with their unidirectional trading volume for ants. Andd here.

    The questions are something like:
    Are they really hodling, are they really locking up supply and not selling the first opportunity when price goes 2x?
    What is the amount of hodlers, is it enough to buy up all the emissions?
    What is the rate of change of hodlers over time? Is it really on an unstopping exponential increase that is enough to buy up all the new supply that will be emitted in the future at a new higher price?
    Is the bitcoin as technology really bullet-proof, decentralized, unstopable?
    Are the hodlers really not delusional like investors in ponzi schemes?

    If answers to all the above questions are “yes”, then it does not matter what is the correlation and beta of bitcoin to stocks for the long-term price of bitcoin (but very good at predicting price in short term), because that correlation does not rule out the hodlers in background that would overpower or significantly skew the stock returns multiplied by beta.

    Both detractors of bitcoin like Warren Buffet and bitcoiners alike are quick to point out that bitcoin isn’t like an investment in the company. And so it is reasonable to question the level of importance of high correlation to stocks. Maybe most of the correlation is actually in the USD part of pairs BTC/USD and SP500/USD? Or it is incidental like periods of high correlations between stocks and bonds?

    1. A lot to unpack here.

      “If you take an asset price history and multiply it by an exponent, the correlation with the original price series will be super close to 1, but the return can be made whatever we want by changing the exponent we multiplied by.”
      That’s false. I calculated the correlation of the monthly returns, not the level. You never want to calculate the correlation of price levels because you might just pick up a common growth trend, even though there’s no correlation.

      You calculations about people saving $1000 a month. You’re confusing currency with investment. In the USD we have a monetary base (actual money in circulation) of only $2.2t. But we have total assets (stocks, bonds, real estate, etc.) worth over $100t floating around. The value of the dollar doesn’t suddenly go up 40x due to that. The currency is used for transacting in the assets, the assets yields profits and have an investment value.

      So, I still don’t see how BTC can serve as a viable INVESTMENT. A currency, yes, and even that’s only a bad one due to the large volatility. But BTC did have a pretty bad run ever since I wrote this don’t you think?

      1. ERN.. To look at 2 months worth of returns of Bitcoin and make a judgment on it is laughable. What kind of a time horizon is that?

        If everyone puts savings into Bitcoin, its value will have to go up because it’s never going to be debased unlike fiat. Increased demand will have to put upward pressure on price. It’s economics 101. Supply and demand.

        No one holds onto USD for savings so its value doesn’t climb in relation to stocks or real estate, in addition to debasement. If the world adopts Bitcoin as a savings technology, supply and demand will make the price go up, hence it will turn out to be an excellent INVESTMENT if bought today, but an excellent savings vehicle if bought 20 years from now when volatility will have reduced significantly.

        While the volatility is high, returns are high. Once volatility reduces, future returns will too reduce. You can’t have your cake and eat it too. It would be unreasonable to expect Bitcoin to have a large return going forward but to have no volatility.

        1. SS, dude, just because you state things doesn’t make them true.

          “No one holds onto USD for savings” is simply a false statement, whether discussing Americans only or people around the world.

          As Daniel Patrick Moynihan famously said: “Everyone is entitled to his own opinion, but not his own facts.”

          1. I was using hyperbole as a rhetorical tool, Andy. I realize many hold onto USD for short term savings, but a far, far larger number hold bonds, equities, and real estate as true long term savings vehicles, although we call them “investments.” In reality, no one with any reasonable amount financial knowledge holds over 20-30% of their long term savings in USD at most for any extended period of time due to inflation.

            It’s just easier to say “no one holds onto USD” for savings for brevity.

            1. So now you’re implying that many folks “with any reasonable amount [sic] financial knowledge” hold over 20%-30% of their long term savings in Bitcoin? Or at least should do so, according to you (else why make that claim)? Hyperbole indeed.

              Perhaps best not to use hyperbolic claims you know to be false, not merely exaggerated, when trying to make a convincing, persuasive argument. Especially where people’s finances are concerned. Just my two bits 😀

            2. BTW, I suspect that in fact many people of modest means in poorly run 2nd and 3rd world countries do in fact keep more than 20% of their long-term savings in USD. Actual bills. And it’s likely somewhat rational for them to do so.

              Of course, these people may well I’m fact over time be likely candidates to use Bitcoin for that purpose. A point in favor of your strong pro-Bitcoin views. But against your suggestions about facts.

            3. Sorry, I feel compelled to make one additional point.

              The predicate to your statement “ No one holds onto USD for savings” was “so its value doesn’t climb in relation to stocks or real estate.” This latter part is patently false as well.

              Declines in the stock or real estate markets, which occur periodically, are precisely when USD *does* climb in relation to those assets! The occurrence of these occasionally steep rises in the relatively value of the USD compared to stocks is, in fact, the the essence of SORR that ERN writes about so frequently on this site!

              So both parts of your statement are false, not just the so-called “hyperbole” portion.

              1. So, short term climb of USD during bear markets is not what I was referring to. I was speaking across decades not years.

                Regarding LONG TERM savings in money/USD (for people with money to spare, not those that need short term savings to pay bills) below is my comment from above with detail for why Bitcoin will command a larger percentage of people’s savings in the future. 20-30% of savings will not be in money when it debases, but it certainly will be when money is stable in value like gold was for centuries.

                “Anyone who invests in index funds is saving. They are saving their work energy and converting it into an asset that they can later spend. That’s by definition saving. If I want to retire in 30 years, I’m not going to save in USD which is guaranteed to lose its value by 2-10% per year. I’m going to save in stocks, bonds, real rate, etc…

                Before we went off the gold standard, people could actually save their money in their currency. They had comfort and security from this. Predictability. They didn’t have to worry about being forced to choose between saving into an asset that could decrease by 50% (stocks) vs buying debt denominated and paid back in a currency whose issuer is incentivized to devalue it year after year through inflation (bonds).”

                Right now people save long term in stocks and use bonds to dampen volatility. With money that doesn’t debase, people can invest what they truly are comfortable investing and can reliably save the rest without worry about loss of purchasing power.

                1. SS,

                  Pretty sure this will be my last response to you. It’s quite clear that you mix together some reasonable arguments why Bitcoin is a good speculation now with assertions – about Bitcoin, “traditional” assets and currencies – that I find dubious, at best (but at least are just that: opinions) with a number patently false assertions of facts and how the world works.

                  Your strongest argument by far is that there are multiple reasons why Bitcoin *could* over time supplant gold as a store of value. IMO you don’t state it particularly well at all, but if that were to eventually occur then, like gold, Bitcoin would from there on have a long-term real return of 0%-1%. You clearly grok – but do a terrible job of explaining – that *if* this does happen, it will surely be at a Bitcoin price much higher than today’s.

                  And unlike ERN, I do actually think there is *some* chance of this happening.

                  But IMO the chance is less than 25% and certainly far less than 50%. You talk as if the chance is greater than 90%, and sometime make ridiculous arguments that it is inevitable.

                  It is now quite clear that you’ve never read much else on this site. Because if you did, you would stop talking about something that has an expected return of approximately 0% long term as an appropriate long term investment vehicle – either for those saving for retirement, or for those who have retired.
                  You finally in this last response come *close* with the idea that – just as is the case with gold today – such a vehicle might make sense as a minority portion of a portfolio for retirees, as ballast against declines in assets like equities. And again I can agree with that.

                  But you mix all this with multiple assertions that are simply false, and then try to explain them away as “hyperbole” or “shorthand”. And you can’t simultaneously argue that Bitcoin is/will be appropriate ballast for stocks and also try to hand wave away steep declines in stocks as being unimportant short term phenomena!
                  Because if volatility is unimportant and the long run is all that matters, then we should all be 100% in stocks always, right? Oh, but of course there’s this nasty SORR issue -which is why we have sites like this!

                  My advice: stick with your “supply and demand, Bitcoin will be the new gold” and therefore Bitcoin is a great speculation today arguments, and stop making other economic assertions about how things work that are simply untrue (and mostly irrelevant). And stop talking as if your case is 100% (or even 90%) certain to come true. Do these three things, and you’re likely to be a lot more persuasive than you are now.

                  Just my two bits.

                2. Andy, I think the real issue is that you expect anyone can convince you of anything on the comments section of a blog. I have 100% conviction in NOTHING. I have 10% of my portfolio in BTC but the other 90% in total US and total international stock market split 60/40. I’ve read most of ERN’s other posts and plan to gradually accumulate bonds as I get older. I’m in my 30s now..

                  You gotta understand nuisance and detail cannot be conveyed in this medium of exchange.

                  It would have been nice to sit down with a beer and chat about this in real life which may have been more substantive.

                  I’d listen to Lex Friedman’s 4 hour YouTube interview with Saifedean Ammous (author of the Bitcoin Standard) or read the book the Bitcoin Standard to get a much more detailed vision of what Bitcoin truly is and why it stands to succeed.

                  But listen, if it’s 2030 and bitcoin is still 30k and the adoption curve has stopped being exponential, I’m 100% OK admitting I was wrong. I’m definitely willing to accept that.

                3. With respect,… I’d start with a data science or econometrics course ahead of those sources. Emmanuel Derman or Paul Krugman, etc have more to offer and can offer a substantive base for understanding and interpreting the financial world. Even books like Hull, “Options, Futures, and other Derivatives” would be more educational. The problem here is one of people talking past each other and then doubling down… not uncommon on the internet.

                  And for the record, ERN would not say he is sure of the future… but he would say he is sure of the probabilities involved (if I may be so bold as to offer a theory on what’s going through someone I’ve never mets’ mind).

                4. No, I wouldn’t go to traditional sources for info on Bitcoin. Most big names in the Bitcoin world list The Bitcoin Standard as a seminal read for anyone that wants to be introduced to Bitcoin in a meaningful way through the lens of the history of money. After reading it and giving it careful thought, I realized I agreed with a lot of what Ammous had to say in the book, although by no means everything he said. And he does have a propensity for hyperbole as well.. 🙂

      2. “But BTC did have a pretty bad run ever since I wrote this don’t you think?”

        Follow the reply chain, man. My reply was to your comment, not the article.. You wrote the article 2 months ago..

        1. My correlations/betas analysis used data since 2017, and then the period since 2020.

          My statement that BTC is down since I wrote the article was just that. That was not about correlations only about poor returns. But if you’re interested, if you *expand* the 1/2020-3/2022 to 1/2020-5/2022 you still have very high correlations and beta.s

          I never proposed using a correlation with only 2 months of data. You’re so blinded by your BTC-fanboy attitude that you spot inconsistencies everywhere you look. But you should just read a bit more carefully.

          1. I have read your article and clearly understand you’re not studying 2 months of correlations.. My reply was to your comment. Anyways, we’re not talking on the same wavelength there so let’s move on

            Regardlesss, the whole article is a useless exercise. Correlations are meaningless even for the last few years. You’re tracking where the ball has been. You’d be better served on studying where it’s going and why.

      3. Thanks for reading my ramblings and a considered reply.

        > I calculated the correlation of the monthly returns, not the level. You never want to calculate the correlation of price levels

        Totally fair, thanks for pointing that out. This toy example with multiplying by exponent of time would be actually adding a constant to price change series which will have correlation exactly at 1, just adding alpha, excess returns.

        >You’re confusing currency with investment. In the USD we have a monetary base (actual money in circulation) of only $2.2t. But we have total assets (stocks, bonds, real estate, etc.) worth over $100t floating around. The value of the dollar doesn’t suddenly go up 40x due to that. The currency is used for transacting in the assets, the assets yields profits and have an investment value.

        It certainely is like that right now. Dollars in addition to not being an investment is also not really satisfing the need for savings. For that we have “risk-free” bonds and real estate. But in hypothetical hyperbitcoinized world that would be certainely different. Dollars have allegedly -2% purchasing power/year, but with bitcoin it would have +2-3% purchasing power/year, about equal to productivity growth. That hypothetical future bitcoin would have 4-5%/year on today’s dollars. Just that would shrink credit, deflate asset prices and certainly satisfy the savings need. What the ratio would be in that world I do not know, but not 1:40. Does it not feel absurd that a roof over the head costs so much with today’s construction technologies? It costs >10 years of median income to buy a median house. The only explanation I can think of for that is that we use houses as money in absense of real money which drives it’s price quite far above costs/utility value by absorbing non-utility demand for scarcity.

        >So, I still don’t see how BTC can serve as a viable INVESTMENT. A currency, yes, and even that’s only a bad one due to the large volatility.

        Sure, it is not an investment, but a bold speculation that it separates money creation from government; stays uncaptured by being not-really-confiscatable because of self-custody and still easily transferable unlike gold; changes credit structure in the economy, etc, etc. Pretty different from a stock or an index of stocks, absolutely. And so it puzzles me why do you think it is reasonable to assume high correlation/beta with stocks over the next 10 years?

        >But BTC did have a pretty bad run ever since I wrote this don’t you think?

        The % of supply of BTC that have not moved for the last year (a good estimation of the btc not sold) is at ATH at 65% and increasing. Pretty impressive hodling for a pretty bad run, don’t you think? I don’t expect it to really decrease until we hit the new price ATH and then some.

        I am in the earlier accumulation years myself. Seeing you advocate >100% stock exposure and also reading a book Lifecycle Investing gave me good reasons to consider >100% stock volatility during this phase. The book recommendation is to cap the leverage to 2x which is a good advice but not really supported by arguments there, but I think I know why. If the position generates leverage without rebalancing (e.g. with futures), it can get margin called and wiped out before making back into profitability. If it does rebalance as in the 2x or 3x ETF, it would be slaughtered by volatility drag as it scales with square of the leverage ratio, making a sad parabola curve instead of a happy line through the tangency portfolio. But bitcoin is a bearer asset without the debt, without leverage, so it does not suffer from the woes of leverage. So I think that it is superior to 4x tangency portfolio even under your return assumptions.

  20. Agreed on all points about Crypto as an investment, but I wonder how useful it is as a benchmark to see what stocks will open at Sunday night following a crazy Friday since there isn’t any stock trading over the weekend. As of now, it looks like BTC is up big today, let’s see tonight if stocks are as well.

    1. I would use the Futures market for that.
      About BTC recently, I think a lot of cash was drained from the banking system and sent to BTC as a safe harbor. But you’re right, if crypto is doing well, it might mean that the world is not going to end.

  21. So ERN, we had some discussion above about bitcoin. I argued that although correlation with stocks were high at that time, they were not high in bitcoin’s past and may not be in the future. In light of recent events, have your thoughts on Bitcoin as an investment changed at all? Just curious. In the 1970s when high inflation persisted, gold did a 10x, much better than equities. I personally wonder what happens to bitcoin this decade if the fed loses control of the inflation narrative. If inflation persists and they can’t raise rates higher due to the banking issues. Likely weaker dollar and surge in scarce assets. Food for thought.


    1. In a strange twist, it seems that BTC in particular and crypto in general saw a large influx because people wanted to to store their money in a safe place and not in the “dangerous” U.S. banking system.
      Maybe this could break the positive strong correlation. But I’d suspect that we go back to “crypto = Nasdaq on steroids” eventually.
      Also: it would be ironic if the folks who “rescued” their cash from SIVB (where it would have been protected after all) and move it to BTC but then lose it all when their exchange goes under like FTX.

      1. The beauty of bitcoin is that it’s a bearer asset. You can self-custody your bitcoin without any reliance on a central entity that may lose it all chasing yield or making ill-fated decisions. Just have to remember 12 words.

          1. Yes, they have. It’s a good thing your bitcoin is not on a USB stick but rather on the bitcoin network, and you can memorize 12 words and take it anywhere in the world with you, in your mind. Or you can etch it in steel and put it in a safe and never lose it. Most people who lost bitcoin lost it before they knew what they had and what it would become. They made a de-facto donation to everyone else holding bitcoin. Fortune favors the brave–and competent.

          2. Didnt SVB go bust though? wasnt that what the big fuss was about, and people losing their money?

  22. I somewhat “followed the herd” along into crypto with a quite small investment of $6000, dollar cost averaged over a couple years. Currently worth $3500… LOL

    1. If you look at bitcoin’s price historically, there are booms in its price following each halving that usher in all these garbage tokens that never last and are scams and rug pulls. Sell anything you’ve bought besides bitcoin and hold the bitcoin until 1 year after its next halving (so hold until 2025).

      1. I doubt that. Without stimulus cash and people having to resume their student loan payments again, I seriously doubt we will see much of a rise in crypto. And even if crypto rises, the volatility is too high to justify the investment.

        1. I agree with you. Crypto won’t rise. Bitcoin will. “Crypto” is a cesspool of unregistered securities and scams. Bitcoin is a pristine digital asset with absolute supply inelasticity that will stand the test of time.

          1. True. I agree that BTC is better than all the other crypto assets.
            But even then, I doubt the volatility and equity correlation justify more than a few % allocation to BTC. Hence this post.

            1. Fair enough. I can respect that. I feel differently and think bitcoin will break the correlation and provide superior risk-adjusted returns over the next decade, but of course nothing is guaranteed. I have 10% allocation. Enough to be meaningful but not ruinous if things don’t pan out as I expect. We shall see. Cheers

    2. You probably invested much less than 4% of your net worth. It’s not going to ruin you financially and if it had performed well it wouldn’t have made you much wealthier either.

  23. Once again, we are seeing that a transient correlation between Bitcoin and tech stocks in the past did not imply permanent correlation into infinity. Bitcoin is not a simple high beta play.

      1. It would be interesting to see its correlation to reports of ransomware attacks and other criminal activity that’s commonly done in BTC.

        1. Are you getting your news from 2013 my dude? Everything done on the Bitcoin ledger is visible for all to see. Same can’t be said for US dollars. Drug dealers get paid much more in cash that Bitcoin.

            1. Absolutely. And quite frankly politicians and banks have a right to be scared of Bitcoin. Politicians won’t be able to launder money nearly as easily on a Bitcoin standard, and central banks and commercial banks can be readily audited for proof of reserves in a transparent way not possible with gold.

      2. What do new asset classes look like as they mature? What sign did Timber or REITs show before they were agreed to as a new asset class?

        1. REITs have been publicly traded equities for as long as I can remember. Not sure when I would set the cutoff when they became mainstream.
          Timber: has probably been a combination of equities and bonds (likely TIPS) for a long time.

          1. All true. My curiosity is what did they look like 10 or 15 years into their split from the stock asset class.

            Perhaps need similar Sharpe ratio that is useful to effient frontier, but not be correlated directly.

            Likely need to have enough Market Cap to be meaningful.

            Need to go through meaningful bear market (2000, 2008).

            1. Probably someone has done that already.

              Also note that a lot of financial data came online in 1970. That was exactly the time REITs were shining, due to their inflation protection. Probably the correlation was lower during that time. But higher during the housing crash in 2007-2009.

  24. Depending on your investment strategy, objectives and risk tolerance – this is how you device and construct your investment portfolio considering all the above. Many people who enter the crypto sphere want to become quick millionaires, it does not work like that! You have to understand the game you are stepping in. Crypto universe is hot and alive, lots of development going on in every blockchain and the overall market cap is on the increasing trajectory. The Wall Street does not want to miss the action, many newcomers from the institutional investors in the current crypto space and this will fuel the next bull run for this exact reason, the next bull run (2025 – 2026 – assuming #USDT does not fall and no major negative economic/financial shifts occur in the markets) will be the crypto bull run on steroids. Bitcoin ETF, Ethereum ETF is just a matter of time and it does not matter if it gets approved before December 31, 2023 or in the first Q1 of 2024, it is a done deal and this have a massive positive net increase effect for mass adoption, crypto market cap growth and the overall crypto utilization. In 2023 alone more retailers and service providers joined the crypto universe by accepting payments with crypto. This development together with EU’s MiCA Act will be a strong foundation support for the next bull run + and then the FOMO effect! $7-$10 trillion crypto market cap (and eventually surpass the gold market cap!) will be the next stop!

    1. You have to be careful with advice like this. LOTS of crypto projects are scams. They give the appearance of progress being made on their blockchains, but in reality they provide nothing of meaningful utility to the world. It’s important to take a step back and realize that BY FAR the best value proposition is Bitcoin offering an escape from fiat currency debasement as we approach the end of a long term debt cycle. No amount of dog tokens printed out of thin air will be of any use in this scenario.

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