Should you invest in crypto? A fundamental question for every investor. In a paper, Ran Duchin, David H. Solomon, Jun Tu, and Xi Wang reach a surprising and provocative conclusion.
The researchers tackle the proverbial elephant in the room: a topic everyone has an opinion on but for which academically grounded portfolio advice is scarce. Using standard, robust portfolio theory, they show that holding no allocation to cryptocurrencies is surprisingly hard to justify—even for a pessimistic investor.
The core puzzle
Conventional wisdom, especially among traditional investors, is clear: cryptocurrencies generate no underlying cash flows, are extremely volatile, and display all the hallmarks of a speculative bubble. Comparisons to the greater fool theory or Ponzi schemes are never far away. The seemingly logical conclusion is to avoid them entirely as a serious investor.
The paper challenges this assumption directly. The authors argue that a zero allocation is not a passive or neutral choice but an active investment decision that requires quantitative justification. It is an implicit bet that the risk-adjusted contribution of the asset to the portfolio is exactly zero. When they test this decision against the cornerstones of modern portfolio theory, cracks appear in the stay-away logic.
Actively shorting
To justify never buying bitcoin based on the historical data of the past decade, an investor would have needed an extremely pessimistic belief from the outset. Concretely, one would have had to assume an expected average monthly return of -10.6 percent for bitcoin, equivalent to an expected annual loss of more than 70 percent. For a diversified crypto portfolio, the numbers are even more extreme, at -19.6 percent per month.
The study shows that most beliefs justifying a zero position mathematically imply that one should actually short the asset. Those who truly believe crypto is a bubble about to burst should, in theory, take an active short position rather than passively staying on the sidelines.
At the same time, the study does not argue for large positions. Optimal portfolio weights are, precisely because of the high volatility, generally small and often fall in the 1 to 5 percent range. High volatility is thus a strong argument for a small, measured position, but not necessarily for a zero position.
Perhaps the most striking finding is that the diversification benefits of crypto are comparable to those of traditional assets. The authors calculate the certain gain an investor would accept as equivalent to adding a risky investment. The benefits of adding a small crypto allocation to a traditional equity portfolio turn out to be comparable to the benefits of established and widely accepted strategies, such as international diversification (adding MSCI World ex-US equities). This reframes the debate on crypto: from pure speculation to a potential diversification tool.
Finally, the cost argument is debunked. While transaction and custody costs are real, the analysis shows they would have to be implausibly high—between 21 percent and 39 percent of invested value per year—to deter investors completely. That is a multiple of the costs associated with other alternative investments.
What can we learn from this?
The main lesson from this paper is that the widespread practice of full non-participation in crypto is likely driven more by behavioral heuristics (a simple rule of thumb such as “when in doubt, do nothing”) than by rational, quantitative portfolio analysis. Possible biases, such as ambiguity aversion and the tendency to stick with the default option (zero), play a major role.
The paper forces investors to critically examine their zero allocation and turns the traditional crypto puzzle upside down. The question is not so much why some people buy crypto, but why so many rational investors choose to hold exactly zero, instead of taking a small, calculated long or short position that portfolio theory suggests would be mathematically optimal.
Gertjan Verdickt is assistant professor of finance at the University of Auckland and a columnist at Investment Officer.