Cryptocurrency Risks

Optimizations given historical data unsurprisingly produce sizeable allocations to Bitcoin (XBT). But further analyses of risks raise questions, even abstracting from expected returns. GARCH-based measures of dynamic XBT volatility and covariance suggest optimal weights change over time. Also, quantile regressions indicate that conditional XBT returns with respect to the S&P 500 are modestly positively skewed. Yet benevolent symmetry is hardly stable or consistent along the distribution. Spectral analysis shows the XBT volatility primarily owes to higher-frequency cycles. Nonetheless, XBT betas are substantially greater, and notably positive, over longer compared to shorter cycles, which implies that XBT has been a much less effective strategic hedge. Also, dynamic principal components analysis indicates that individual coins’ exposures to the “crypto market factor” have likely increased meaningfully enough over time to diminish diversification benefits