In a challenge hosted by Kraken, the Investment Case Study Competition, Tulane University’s Freeman School of Business has won the top prize of $10,000. They provide evidence that a 67:33 Bitcoin to Ether ratio for a hypothetical portfolio would provide a diversified investment while still seeing outstanding returns.
The crypto-related challenge posed by Kraken and The Economist to 13 teams at business schools located globally was as follows:
“Bitcoin vs Ethereum: You have $1M to invest across these two blockchain technologies by buying bitcoins and ethers – the digital assets or “cryptocurrencies” that power these decentralized computer networks. You cannot touch your investment for the next 5 years. How much of that $1M do you invest in each? Why?”
The Freeman School of Business from Tulane University suggested using the 67:33 ratio in a minimum variance portfolio (MVP), where assets are less risky when invested together based on the expected rate of return.
This method was examined with the utilization of multiple regression models, to forecast prices of Bitcoin and Ether, and these models showed that the MVP had the second highest return following the full Bitcoin portfolio. Also, back-testing showed that the team’s chosen MVP had the lowest variance and comparable returns to a full Ether portfolio. The 52-week Monte Carlo simulation also displayed similar results, shown below.
While the team’s evidence points to strong support for their choice, they also stated that:
“the [portfolio’s] combination strikes an intuitive balance between the upside potential of Ether and the relative staying power of Bitcoin.”
Second place was awarded to the team at Ryerson University’s Ted Rogers School of Management. With their 69:31 ratio, Ryerson adopts a slightly more “conservative” portfolio by favoring Bitcoin a little more than Freeman. The team analyzed the historical performance of both currencies and by extrapolating these values, formed a five-year projection.
Coupled with conversations of industry leaders and adjusting the estimations for the variance, the team weighted their findings and came to the conclusion that while Bitcoin offered a higher expected value, a significant percentage should be allocated towards Ether for the sake of diversification.
Third place is, even more, Bitcoin dominant than the first two, with a 78:22 ratio. BYU Marriott School of Management differs from the other two in that instead of relying heavily on historical data to come to weighted investments; the team assessed the question “through an extensive evaluation of seven fundamental attributes that are indicative of the potential longevity of each currency.”
As the data size for both of these digital assets is quite small, as well as being extremely volatile and could be completely irrelevant in five years, BYU takes a more theoretical approach with the same concision in the end; Bitcoin should be the majority of an investor's cryptocurrency portfolio.
Kraken may have created this case study for their use, and may indeed have a significant amount of funds they would like to hold without touching for several years with an expectation of returns associated with cryptocurrency. Regardless, investors could also use the data publicized in their own portfolio’s, balancing allocation to around 67 percent Bitcoin and 33 percent Ethereum for the best balance between risk and reward.