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How To Size Your Bitcoin Investment If You Must Buy Some

Proper Risk Management Is Critical

Bitcoin Is Way More Volatile Than Stocks

Bitcoin is way more volatile than stocks (Source: Sharadar)

Bitcoin Is More Correlated To Stocks Than You Would Think

Bitcoin spends much of the time with a positive correlation to stocks (Source: Sharadar)
Bitcoin crashed along with stocks last March (Source: Sharadar)

Sizing Your Bitcoin Investment

import numpy as np
import pandas as pd
# w is the weight of bitcoin in the portfolio
w = 0.2
# 1-w is the weight of stocks
W = np.array([[w, 1-w]])
# Calculate the portfolio's weekly volatility
# gbtc returns is a dataframe that whose columns are
# 1) Bitcoin returns and 2) S&P 500 returns
port_vol = ((W@gbtc_returns.cov()@W.T)**0.5).loc[0,0]
# Calculate marginal contribution to variance
mctv = gbtc_returns.cov()@W.T
# Calculate marginal contribution to risk by scaling mctv by portfolio weights
mctr = (mctv/port_vol*W.T)*(52**0.5)
Bitcoin contributes most of the risk (Source: author’s calculations)
Bitcoin contributes most of the risk (Source: author’s calculations)

Data Science @Solovis, Doing my Best to Explain Data Science and Finance in Plain English. Follow my publication at: https://medium.com/alpha-beta-blog

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