13 ms·

It would be interesting to hear a real quants take on the utility of having bitcoin as a (small) asset class in your portfolio. How much correlation does bitcoi

by gfodor 15y ago

It would be interesting to hear a real quants take on the utility of having bitcoin as a (small) asset class in your portfolio. How much correlation does bitcoin have to any other asset class? I'd wager very, very little, making it a strong candidate for diversification. That said, it's overall volatility might offset the reduced expected volatility you'd see in your portfolio by holding some.

dailyllama 15y ago
Bitcoin is exceptionally illiquid. You can't buy or sell any meaningful quantity of them without moving the market. As such, it's not really a viable asset class unless your net worth is ridiculously insubstantial.
nandemo 15y ago
I'm not a quant, but you also have to consider the operational and regulatory risk of dealing in bitcoins. The people who are currently trading bitcoins don't necessarily have to follow the same regulations that banks and trading houses do. Also, consider that over 80% of the foreign exchange market is accounted by 6 currencies or so: US dollar, yen, euro, British pound, Swiss franc and Australian dollar. Traders barely bother with the Brazilian real or Indian rupee, even though these currencies are much more likely than bitcoin to be around in 5 years.
- jerguismi 15y ago
  > even though these currencies are much more likely than bitcoin to be around in 5 years. How so? As bitcoin is a p2p network, it is likely to be around whatever happens. The only thing that could happen would be that internet breaks down - pretty unlikely, I think. Even when internet breaks in several pieces, each "local internet" will just use their own bitcoin - the block chain will be split in to several. After the two "local internets merge", the blockchain which has more computation behind it, will win. In discussion, you should separate two things a) bitcoin's economic value/utility b) bitcoin network itself. I'm pretty sure that bitcoin itself will be here about forever, however it is pretty unclear if anyone will use it.
  - morsch 15y ago
    BTC will be around but a fluid market for BTCUSD or BTCEUR -- ie. a plentiful amount of people interested in buying or selling bitcoin for other currencies -- won't necessarily be.
    - jerguismi 15y ago
      This is true. Goverments could start shutting down bitcoin exchanges any day. Luckily we can still survive with cash exchanges and/or decentralized exchanges. Or maybe people would simply lose their interest in to bitcoins, or start using something else. Maybe Google will invent their own bitcoin, and everyone starts using that. Or maybe something else happens.
    - moldbug 15y ago
      Upvoted. When the USG starts shutting down the exchanges, which will happen any minute now, Bitcoin will go to zero and stay there. Everyone who thought their BTC was worth USG will want out - and find that the doors are now locked. The BTC price won't even be epsilon. It'll be zero. The monetary design of Bitcoin is sound. The political design, not so.
      - kylebrown 15y ago
        Most exchanges are outside the USG's jurisdiction. Even if the USG tries to crack down, there will always be workarounds. The USG has been cracking down on online poker and gambling sites fir years, but that has never stopped the growth of the online-poker market in the US (to this day, online poker sites continue to sponsor poker tournaments that are aired on ESPN). The USG has been successful killing payment companies before (eg e-gold, epassporte, neteller), but those were of course centralized systems. Bitcoin is decentralized, which is why its supporters believe that it is here to stay regardless of the actions of any particular government.
        moldbug 15y ago
        The agencies fighting against online poker are much weaker; also, poker is a profitable business that can defend itself. The US dollar is a centralized system. US financial regulation is in effect worldwide (except now Iran, I guess). If you have a decentralized system dependent on a centralized one, it's a centralized system. Bitcoin is not dependent on the USD for its operations, just for its value. The day after MtGox (for instance) is indicted, everyone will be selling and no one will be buying. Also, all payment processors everywhere will cut off all Bitcoin exchanges everywhere. (Everywhere excluding Iran, I guess. Is Bitcoin big in Iran?)
clarkmoody 15y ago
As for portfolio allocation, you are right about the volatility being high, thus the allocation being small. At this point, Bitcoin is being treated as a speculative instrument. It does not share the same status as gold, being a store of value, and thus it will not move based on the fears and hopes of fiat currencies. From that standpoint, it should be entirely uncorrelated from the fiat banking system and traditional investments. Be careful if you are trading for Bitcoins denominated non-USD, as those prices will move with exchange rates as well. From a regulatory standpoint, Bitcoin is in limbo. Right now, it's no different than trading bottle caps, but when the regulators come down on it, there will be a different story. In short, the two forms of investment risk you face are volatility price risk and regulatory risk.
JumpCrisscross 15y ago
I was a quant prop derivatives trader at an investment bank. The correlation between MtGox/USD [1] and GLD daily returns over 12 April 2011 - 30 March 2012 is 0.02; a linear regression produces a 0.151 beta (GLD daily returns independent) with a coefficient of determination of 0.0004. GLD had a period return of 14% with an average daily return (standard deviation) of 1.4% (0.1 percentage points); MtGox/USD had 531% with 10.2% (1.3 percentage points). It thus seems like it could have a place in a portfolio above (in terms of risk) small cap and emerging market stocks (on your worst day in GLD you lost 5.5%; in MtGox/USD 35.8%. Also, GLD delivered 2.7 times the return per unit of risk). Methodology note: since MtGox trades every day and GLD only on trading days, I used closing prices for trading days. Bitcoin takes the monetary system back essentially a hundred years. We know how to beat that system. In fact, we know how to nuke it for profit. Bitcoin is volatile, inherently deflationary and has no lender of last resort. Cornering and squeezing would work well - they use mass in a finite trading space. Modern predatory algos like bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, e.g. an inherently deflationary one), would rapidly wreak havoc. There is also a part of me that figures regulators will turn a blind eye to Bitcoin shenanigans. [1] http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g25zv http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g2...
- nl 15y ago
  This post deserves to be read much more widely than it probably will.
- MrMan 15y ago
  /bitcoin let's move on to something else
  - MrMan 15y ago
    No - seriously - bitcoin has nothing to recommend it! How many times must people who know what they are talking about poke holes in the bitcoin fantasy? Why are self-identified "tech" people clinging to bitcoin? If one is really hell-bent on designing an alternative currency learn from the problems that bitcoin has, and move on to something else. Ignoring the analyses offered by experienced traders, economists, and their like will result in more bitcoin-related mishaps.

by gfodor 15y ago

dailyllama 15y ago

Bitcoin is exceptionally illiquid. You can't buy or sell any meaningful quantity of them without moving the market. As such, it's not really a viable asset class unless your net worth is ridiculously insubstantial.

nandemo 15y ago

I'm not a quant, but you also have to consider the operational and regulatory risk of dealing in bitcoins. The people who are currently trading bitcoins don't necessarily have to follow the same regulations that banks and trading houses do. Also, consider that over 80% of the foreign exchange market is accounted by 6 currencies or so: US dollar, yen, euro, British pound, Swiss franc and Australian dollar. Traders barely bother with the Brazilian real or Indian rupee, even though these currencies are much more likely than bitcoin to be around in 5 years.

jerguismi 15y ago
> even though these currencies are much more likely than bitcoin to be around in 5 years. How so? As bitcoin is a p2p network, it is likely to be around whatever happens. The only thing that could happen would be that internet breaks down - pretty unlikely, I think. Even when internet breaks in several pieces, each "local internet" will just use their own bitcoin - the block chain will be split in to several. After the two "local internets merge", the blockchain which has more computation behind it, will win. In discussion, you should separate two things a) bitcoin's economic value/utility b) bitcoin network itself. I'm pretty sure that bitcoin itself will be here about forever, however it is pretty unclear if anyone will use it.
- morsch 15y ago
  BTC will be around but a fluid market for BTCUSD or BTCEUR -- ie. a plentiful amount of people interested in buying or selling bitcoin for other currencies -- won't necessarily be.
  - jerguismi 15y ago
    This is true. Goverments could start shutting down bitcoin exchanges any day. Luckily we can still survive with cash exchanges and/or decentralized exchanges. Or maybe people would simply lose their interest in to bitcoins, or start using something else. Maybe Google will invent their own bitcoin, and everyone starts using that. Or maybe something else happens.
  - moldbug 15y ago
    Upvoted. When the USG starts shutting down the exchanges, which will happen any minute now, Bitcoin will go to zero and stay there. Everyone who thought their BTC was worth USG will want out - and find that the doors are now locked. The BTC price won't even be epsilon. It'll be zero. The monetary design of Bitcoin is sound. The political design, not so.
    - kylebrown 15y ago
      Most exchanges are outside the USG's jurisdiction. Even if the USG tries to crack down, there will always be workarounds. The USG has been cracking down on online poker and gambling sites fir years, but that has never stopped the growth of the online-poker market in the US (to this day, online poker sites continue to sponsor poker tournaments that are aired on ESPN). The USG has been successful killing payment companies before (eg e-gold, epassporte, neteller), but those were of course centralized systems. Bitcoin is decentralized, which is why its supporters believe that it is here to stay regardless of the actions of any particular government.
      - moldbug 15y ago
        The agencies fighting against online poker are much weaker; also, poker is a profitable business that can defend itself. The US dollar is a centralized system. US financial regulation is in effect worldwide (except now Iran, I guess). If you have a decentralized system dependent on a centralized one, it's a centralized system. Bitcoin is not dependent on the USD for its operations, just for its value. The day after MtGox (for instance) is indicted, everyone will be selling and no one will be buying. Also, all payment processors everywhere will cut off all Bitcoin exchanges everywhere. (Everywhere excluding Iran, I guess. Is Bitcoin big in Iran?)

clarkmoody 15y ago

As for portfolio allocation, you are right about the volatility being high, thus the allocation being small. At this point, Bitcoin is being treated as a speculative instrument. It does not share the same status as gold, being a store of value, and thus it will not move based on the fears and hopes of fiat currencies. From that standpoint, it should be entirely uncorrelated from the fiat banking system and traditional investments. Be careful if you are trading for Bitcoins denominated non-USD, as those prices will move with exchange rates as well. From a regulatory standpoint, Bitcoin is in limbo. Right now, it's no different than trading bottle caps, but when the regulators come down on it, there will be a different story. In short, the two forms of investment risk you face are volatility price risk and regulatory risk.

JumpCrisscross 15y ago

I was a quant prop derivatives trader at an investment bank. The correlation between MtGox/USD [1] and GLD daily returns over 12 April 2011 - 30 March 2012 is 0.02; a linear regression produces a 0.151 beta (GLD daily returns independent) with a coefficient of determination of 0.0004. GLD had a period return of 14% with an average daily return (standard deviation) of 1.4% (0.1 percentage points); MtGox/USD had 531% with 10.2% (1.3 percentage points). It thus seems like it could have a place in a portfolio above (in terms of risk) small cap and emerging market stocks (on your worst day in GLD you lost 5.5%; in MtGox/USD 35.8%. Also, GLD delivered 2.7 times the return per unit of risk). Methodology note: since MtGox trades every day and GLD only on trading days, I used closing prices for trading days. Bitcoin takes the monetary system back essentially a hundred years. We know how to beat that system. In fact, we know how to nuke it for profit. Bitcoin is volatile, inherently deflationary and has no lender of last resort. Cornering and squeezing would work well - they use mass in a finite trading space. Modern predatory algos like bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, e.g. an inherently deflationary one), would rapidly wreak havoc. There is also a part of me that figures regulators will turn a blind eye to Bitcoin shenanigans. [1] http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g25zv http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g2...

nl 15y ago
This post deserves to be read much more widely than it probably will.
MrMan 15y ago
/bitcoin let's move on to something else
- MrMan 15y ago
  No - seriously - bitcoin has nothing to recommend it! How many times must people who know what they are talking about poke holes in the bitcoin fantasy? Why are self-identified "tech" people clinging to bitcoin? If one is really hell-bent on designing an alternative currency learn from the problems that bitcoin has, and move on to something else. Ignoring the analyses offered by experienced traders, economists, and their like will result in more bitcoin-related mishaps.