A reliable comedy bit is to take something absurd and treat it seriously. Examples include Malvolio in Twelfth Night, Batman in The Lego Movie, most Terry Pratchett novels, Taskmaster, and sellside coverage of crypto.
The quant team at Citigroup has a take on the trope. It asks: What happens if an investor adds bitcoin to their 60/40 portfolio?
Turns out the portfolio goes up and down a lot more . . .
. . . where the main beneficiaries are going to be investors with access to a time machine:
This is Citi’s third note to clients since October on crypto weighting strategies.
Its first note concluded that buying a lot of bitcoin would’ve worked historically — in the sense that adding something that went up a lot to a portfolio would make the portfolio perform better — but it would be important to accept the regular floggings, since the timing of buys and sells is indistinguishable from luck. Its second note revealed that adjusting the size of the bitcoin allocation based on its recent volatility was a way to control for volatility.
How much an investor chooses to allocate to bitcoin is going to depend on how much they want their portfolio to go up and down, Citi’s summary presentation summarises:
“Reverse-optimisation in the style of Black-Litterman:” the bank deadpans with reference to the below chart, “Prior calculation implies double-digit return expectations for a 5 per cent allocation to bitcoin to be optimal.”
Also: “Summary statistics show higher autocorrelations and positive (or less negative) skew compared to traditional assets.”
After which Citi falls back on the classic “hedging with bitcoin” material:
A lengthy disclaimer follows, explaining that Citi’s crypto valuation models are “for informational purposes and to assist readers in their consideration of cryptocurrencies.”
Also, “Citi is neither endorsing cryptocurrencies nor providing a view or recommendation on a particular cryptocurrency. Nor does Citi have a view on the regulatory status of cryptocurrencies.” Etc.
Nevertheless!
Coinbros, hope you’re enjoying the tradfi mainstream. Remember to tip your servers.