How Much Bitcoin Should I Own?

If you are curious about adding bitcoin to your digital asset, here’s a mathematical answer to help you.

Over the past few years, we have seen dramatic ups and downs of bitcoin and other digital cryptocurrencies. After an 80% decline in 2018, the sentiments of investors have changed from quite different angles and institutional investors are analyzing bitcoin very carefully.

This all connects to one question: How much cryptocurrency should I own?

Although it is a hard question to answer. but through modern quantitative finance, we can get a potential answer. Wall Street traders have used a mathematical framework known as the “Black Litterman” model to manage their portfolios.

This model starts with a normal, equilibrium portfolio and layout the mathematical formula. which increases your assets based on your view of the world.

It subsumes not only your estimate about growing investments, but also your confidence in that estimate, and converts those inputs into a particular portfolio.

Your Starting point should be 0.50%

If you don’t know what investments might perform worse or great? or don’t have any other views, this is the portfolio you should believe holding. Because Black Litterman Model uses the world market portfolio that means all asset holdings in the entire world.

In 2021, the global stock market reached $95 trillion and the global market of bonds reached $105 trillion. The cryptocurrency shows 0.5% of the global market portfolio. Some investors suggest holding more cryptocurrency and some arguments to hold less. Thus, a model that represents 0.5% should be the starting point.

Now here are the real mathematics works:

for any given investment in cryptocurrency, the Black-Litterman will return the amount that you hold in your portfolio.

How to use it?

First, Select how much bitcoin will exceed, from 5% to 40%. Each expectation connects to a line on a chart. For example, If you think bitcoin will outdo by 30%, this connects to the blue line. Now follow the line left or right based on your will and confidence. If you are sure at least 75% confident, the blue lines up to 6% allocation to bitcoin.

Asset Volatility and the correlation between assets

The main inputs into the Black Litterman model are global market caps, asset volatility, and the correlation between assets.

Bitcoin Volatility

Over the last 5 years, bitcoin volatility increases 6x that of stocks and 30x that of bonds. During its worst, the crypto coins declined 80% in the worth, and stocks went down 20%. Other cryptocurrencies performed worse.

If an asset is extremely volatile, investors will need higher returns of investment. otherwise, they do not choose to invest. Bitcoin is volatile but it has a small number of investments relative to stocks or bonds. Many traders still don’t see the power returns as worth the risks.

Bitcoin’s correlation with stocks and bonds.

It means when stocks go up or down, bitcoin may do good as well. The lower the correlation, the greater the heterogeneity cryptocurrency provides to your portfolio. Bonds have a 1.5% low correlation with stocks. Bitcoin’s correlation is 23.7% greater that means it needs some diversification profit to the portfolio. but not as same as bonds.

This mathematical model can guide you to understand what kind of allocation to crypto might be favorable to you.

Disclaimer

This article is for informational and educational purposes only. It is not intended to be any investment advice or suggestion.

Source: https://www.kiplinger.com/investing/602384/how-much-bitcoin-should-i-own-a-mathematical-answer