Market Research – Dec 2019

All i want for Christmas is...some Bitcoins!Dec 2019

By David Lifchitz – Managing Partner, ExoAlpha, December 23th, 2019



It’s Holiday Season: time to chill and enjoy friends and family, and as the New Year comes, it’s also time to make new resolutions… As you may be like my cousin (early 30s’) or my uncle (retired) featured below, I wanted to share with you a discussion I had with them over a family dinner this Holiday Season, about financial planning and Bitcoins!

Last week, at a family gathering around a nice meal (thank you Mom!), one of my cousin who is in his early 30s’ asked me: “Hey, you’re the Finance guy here, so I have a question for you: I’ve been a bit greedy with adjusting my investment portfolio this year, seeing the CAC40 (French Large Cap Stock Index) going up by almost 30% in the last 12 months, and I’m afraid we may be in for a correction sooner rather than later, but I don’t know what to do. What would you advise me to do?…”, then when he was hardly done, his father asked me: “Well, John (this is not my cousin real name) is young and has time to make up for a potential loss… but you know, I’m retired and live on fixed income almost, and inflation is eating my budget every day, and don’t get me started on my taxes going up… what should I do?…”

Before telling you what kind of advice I gave to each of them, I would like to highlight a few things:


How do we get there?

Over the last decade, basically since the 2008 financial crisis, Central Banks worldwide have cut interest rates to never-seen-so-low levels while at the same time have injected trillions of freshly printed dollars, euros, yen, yuan, etc. in their financial systems.

This has led to sky-rocketing asset prices in all asset classes worldwide (stocks, bonds, real estate, private equity, etc.), but the promised “trickle down economics” never materialized. Central Banks’ “created-out-of-thin-air-money” went straight into financial assets and never touched the “real economy”. Despite all these trillions of dollars, 10 years after the last financial crisis, we have seen a moribund recovery of the “real economy”, which is again on the verge of entering in recession territory.

Central Banks have completely distorted the healthy historical relationship that existed between the stock market and the real economy. Historically, the stock market tended to be a leading indicator of the real economy, but today they are both in their own worlds, completely decoupled.

Facing hardly wobbling financial markets this Summer, Central Banks hit the printing presses again in the Fall to keep the bubble inflated, but the financial markets are like drug addicts: they always need more, until they do an overdose.

This situation is totally unsustainable and I fear the next financial crisis will be of uncommon proportion vs. the 2008 one. Maybe a 1929-like one, maybe worst… who knows? Why? Because we live in the mother-of-all bubble: all assets are inflated beyond any rational value, worldwide!

When will the mother-of-all bubble burst? Having no crystal ball nor superpowers to see in the future, I cannot tell, but one thing is sure, watch out below when it bursts.


My cousin and his father:

My cousin and his father are in two different situations: the younger needs to grow his net worth to build his projects (buying a home, saving for his own retirement as the public retirement system is imploding in France (but is also in other parts of the world…), while the elder wants to sustain his living while facing inflation and increasing taxes.

As my cousin’s father highlighted, his son has a well-paying job which provides him income and he has some savings, so he can tolerate more risk in order to get a better return than his father who has less needs (already owns a home, his kids are on their own and autonomous, etc.).

But both are facing, on the one hand, the same worldwide-overinflated-assets that will crash one day all at once, making my cousin anxious of remaining invested, and on the other hand, negative interest rates (ECB Rate is -0.5%) that are killing my uncle fixed-income portfolio: one is afraid of remaining invested and would be reinsured being in cash, though having the fear of missing out on a few more points if the markets’ levitation keeps on going, and the other one is pushed to get more exposed to higher-risk/higher-return assets by the negative rates to just sustain his living, while fearing to get seriously hit when the bubble burst.


So what should they do?

Having not seen them in over a year, and having not talked about their financial situation in years, I asked them if they were familiar with Digital Assets: “Hey guys, do you know what Digital Assets are? Ever heard about Bitcoin?…”

Then they both stared at me: my cousin had heard a bit about Bitcoin, but for my uncle it was just a buzz word. My cousin then said: “Well, I’m telling you that I’m afraid of being so much invested and you ask me about this roller-coaster Bitcoin thing??!…” and my uncle added: “David, I’m seeking your advice to beat inflation, not to gamble my retirement!…”. I smiled… and told them that some Bitcoin exposure is a way to solve both of their problems, even if their problems look opposite. They asked me if I was taking some crazy peals or what…

Then I asked them:

Do you both agree that we are in the mother-of-all-asset-bubble-worldwide?… Yes!

Do you both agree that negative interest rates are insane: banks are paying borrowers and not the way around, and banks deposits are taxed?… Yes!

John, you have a higher tolerance for risk than your father, let’s say a 20% drawdown if you can expect a 15% return on investment?… Yes!

Harry (my uncle), given negative rates of -0.5% these days, inflation (officially less than 1% according to the ECB but including growing taxation it is closer to 3% a year), you’d expect a 4% annual return in order to stay afloat, right?… Yes!

So????… they asked me impatiently!

I explained:

Bitcoin is a decentralized Digital Asset, which has been the best performing asset over the last 10 years (annualized return of +240%), i.e. since its creation in early 2009. Of course, past performance is not a guarantee of results, but since Bitcoin is in fixed supply, and only valued based on supply and demand, it should keep on performing against other asset classes which prices are highly manipulated by Central Banks.

Another interesting feature of Bitcoin, is that it has been (at least so far, and I expect to remain as such in the near future), completely decorrelated with all other asset classes, making it a great diversifier into a global portfolio.

But the reason why I mentioned Bitcoin, is its unique asymmetric potential: it can either shot to the moon or disappear.

Harry interrupted me: “Interesting, but I’m not looking for a digital lottery ticket!…”

I said: “Look Harry, what do you think of having 2% to 5% of Bitcoin in your portfolio, surrounded by 98% to 95% of cash?”

Harry remained silence, visibly surprised. So I continued: “Let’s take an example of a 100€ initial investment, invested 5% in Bitcoin and 95% in Cash with a negative rate of -0.5% over one year. Let’s assume that Bitcoin disappears, i.e. its value goes to 0: the return of the portfolio would be 5%*(1-100%) + 95% * (1-0.5%) ~ -5.5%. That would be the absolute worst-case scenario: an absolute maximal loss of -5.5% of the amount invested. Now on the other end, let’s assume that Bitcoin goes up by 100% over the year. The same portfolio would return 5%*(1+100%) + 95% * (1-0.5%) ~ +4.5%.

Do you know any other asset class with such an asymmetric potential over a 12 months period?

Harry began to understand my point: instead of mixing a bunch of correlated overpriced assets into a portfolio, I was just playing it safe with 95% of cash and just 5% invested in a risky asset, which has a tremendous upside/downside asymmetric profile.

John was also getting it, and said “so for my father, who cannot tolerate much downside in his portfolio, just a 5% of Bitcoin would provide him a return to sustain his living without taking much risk, because of the asymmetric nature of Bitcoin return, and replacing Bitcoin by any other asset with not as much asymmetrical potential would require a much larger position in the portfolio, i.e. a bigger risk!”

“Exactly John, you nailed it!”. Harry was getting excited about this new way of investing. But John said that since he expects a higher rate of return on his investment, but who is also ready to take a more important loss than his father can tolerate, he could use the same approach but with a, let’s say, 15% allocation of Bitcoin and 85% in Cash. I explained to John that I would not recommend such a large passive investment of his hard-earned euros into Bitcoins as a total loss in his Bitcoin position would hurt him more than he thinks, but that I’d be happy to explain to him what my partners and I do at ExoAlpha, providing actively traded investments in Bitcoin and other Digital Assets in order to increase the asymmetric potential of these assets.

After coffee, we fired-up Excel and made some simulations, that I detail in the second part of this article.



In the first part of this article, I explained a discussion about financial planning I had with my cousin John  (who is in his early 30s’) and his father Harry (who is retired), and how one of the most “roller-coasteresque” asset of the last decade (i.e. Bitcoin) could help them both answering their investment conundrum.

In this part, I continue with the more technical discussion that followed that dinner, in order to bring a scientific rational to the casual conversation.

As you may be like my young cousin or my retired uncle, you may find the findings below interesting.


I. Crunching the numbers

  • We began by collecting some historical market data on Bitcoin and other assets, starting on Jan.1st, 2015. We picked Jan.1st, 2015 as the first day where we had reliable prices for Bitcoin, since prices before that were way more sporadic due to its inception just a few years prior, and being not very liquid back then were not reflective of the price moves we’ve seen since.

  • We wanted to assess the annualized return of a portfolio containing x% of Bitcoin and (1-x)% of Cash with different yields, and how much of other highly liquid assets (SP500 Index, US 10 Year bond, Gold) would be needed along with cash to obtain the same annualized return.

  • An important point that need to be highlighted, is the maximum drawdown each of these assets suffered individually over the analysis period:

Analysis period: Jan.1st, 2015 – Dec.24th, 2019, Daily basis.

We quickly notice that Bitcoin almost became extinct over that period with more than 83% of loss, whereas the other assets witnessed only mild drawdowns. Should we had extended the timeframe to pre-2008 financial crisis, the other assets would have witnessed much deeper drawdowns too (in the 50% range).

In order to keep the portfolio in check, we applied a monthly rebalancing back to the initial allocation, in order to avoid having Bitcoin occupying a too large position in the portfolio should it rally. We note the highest weight the asset would have had over the period (Maximum Asset Weight) between 2 rebalancings, in order to assess the absolute loss not on the initially invested amount (which is x%), but on the total value of the portfolio. This number represents the maximum loss an investor holding such a portfolio would incur should the value of that asset were to go to 0 instantly at any given time.

Data Sources:

Bitcoin (BTC):

S&P500 (SPY):

US 10 Years (IEF):

Gold (GLD):


1% BTC / 99% Cash @ 0%

We began by first assessing what would have been the return of a portfolio with 1% invested in Bitcoin and 99% in Cash with a 0% yield, on an annualized basis over our analysis period (Jan.1st, 2015 to Dec.24th, 2019). It would have been +0.93%.

In order to get the same annualized return than with our 1% Bitcoin + 99% cash@0% portfolio, we would have needed 7.9% of SP500 and 92.1% cash@0%, or 32.5% of US 10 Years and 67.5% cash@0% or 18.5% of Gold and 81.5% cash@0% over the same period.

When assessing the Maximum Asset Weight, we note that the maximum Bitcoin exposure would have been 1.92%, whereas it would have been 8.70% for the SP500, 33.45% for the US 10 Years and 20.23% for Gold.

Thus, using any other asset than Bitcoin, they would have required a much bigger position of any of these assets in the portfolio in order to get to the same annualized return of the 1% Bitcoin +99% Cash@0% portfolio, exposing thus the investor to higher risks.

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

Also interesting is to look at the maximum drawdown of the portfolios over the period: the maximum drawdown of the 1% Bitcoin + 99% Cash@0% portfolio is -1.62%, very close to the maximum drawdown of the portfolio with 7.9% SP500 + 92.1% Cash@0% (-1.58%), even if over the considered period, Bitcoin witnessed an 83% drawdown whereas the SP500 had only a 19% drawdown, demonstrating the robustness of our approach from a risk perspective. Should the SP500 had just a 50% drawdown (like it did during the 2008 financial crisis), the maximum drawdown of the SP500+Cash portfolio would have been much deeper, and would have also required a much higher allocation to match the 1% Bitcoin + 99% Cash@0% portfolio.

Lastly, we observe that the 1% Bitcoin + 99% Cash@0% has the highest Shape and Sortino ratios vs. the other portfolios, and again, even as it includes an asset that witnessed an 83% drawdown whereas the other assets never had a drawdown below 20%!


1% BTC / 99% Cash @ -0.5% (Europe ECB Rate)

We conducted the same analysis with Cash having a negative yield of -0.5% as it is currently the case in Europe.

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

We observed the same behavior.


1% BTC / 99% Cash @ +1.55% (US Fed Rate)

We conducted the same analysis with Cash having a positive yield of +1.55% as it is currently the case in the US.

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

We observed the same behavior.


II. Beating inflation with Bitcoins

We conducted a similar analysis, but this time fixing the desired annualized return we seek over the period and determining how much of which asset we would have to mix with cash in order to get to that annualized return.


Beating inflation in Europe

As of December 2019, the ECB rate is -0.5%, and the latest official inflation number available as of November 2019 (HICP) is +0.96%, leading thus to an annual rate of erosion of the value of the money of -0.5% -0.96% = -1.46%.

Therefore, how much Bitcoin, SP500, US 10 Year, or Gold should have been mixed with Cash@-0.5% in order to get an annualized return of +1.46% over the period Jan.1st, 2015 to Dec.24th, 2019?

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

We end up with 2.1% of Bitcoin, or 16.1% of SP500 or 58.7% of US 10 Years or 36.5% of Gold and the same observations as before: Bitcoin is the big winner of the contest!


Beating inflation in the US

As of December 2019, the FED rate is +1.55%, and the latest official inflation number available as of December 2019 (CPI) is 2.05%, leading thus to an annual rate of erosion of the value of the money of 1.55% -2.05= -0.50%.

Therefore, how much Bitcoin, SP500, US 10 Year, or Gold should have been mixed with Cash@+1.55% in order to get an annualized return of 2.05% over the period Jan.1st, 2015 to Dec.24th, 2019?

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

We end up with 0.54% of Bitcoin, or 4.80% of SP500 or 38.00% of US 10 Years or 14.00% of Gold and the same observations as before: Bitcoin is the big winner of the contest!


III. Bitcoin to the rescue of the conservative investor: Harry’s portfolio (5% Bitcoin + Cash)

We finally assessed Harry’s discussed portfolio with 5% of Bitcoin.

By leaving in France, my uncle Harry has to deal with negative interest rates of -0.5%, but we also conducted the analysis if he was living in the US, enjoying a positive +1.55% interest rate instead, as some US-based readers may be interested in.


5% Bitcoin + 95% Cash@-0.5% (Europe ECB rate)

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

My uncle Harry needed a +4% annualized return in order to beat his perceived level of inflation and negative rates. He would have reached his goal with only a 5% investment in Bitcoin along with 95% in cash@-0.5% risking an absolute maximal loss of 9.24% of his portfolio value at any moment should Bitcoin disappeared overnight, and would have witnessed a -8.3% maximum drawdown.

In order to reach his goal with an investment in the SP500 instead of Bitcoin, he would have needed to invest 38.6% of his portfolio in the US large cap stocks or 93.7% of his portfolio in gold, which are out of question for him to take such big exposure in his situation. Interestingly enough, even a 100% investment in US 10 Year bond wouldn’t have returned more than 2.80% on an annual basis, while incurring a worst drawdown than with stocks or Bitcoin! And having invested in gold instead, he would have witnessed a -18.6% drawdown of his portfolio value at some point, which would have definitely stressed him out!


5% Bitcoin + 95% Cash@+1.55% (US FED rate)

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

We present above the same analysis but for a US investor able to get a +1.55% return on Cash. Again, an investment in Bitcoin is the best option for him.



IV. Bitcoin to the rescue of the balanced investor: John’s portfolio (15% Bitcoin + Cash)

We finally assessed John’s discussed portfolio with 15% of Bitcoin.


15% Bitcoin + 85% Cash@-0.5% (Europe ECB rate)

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.

In order to beat a 15% Bitcoin + 85% Cash@-0.5% an investor would have had to invest more than 120% of his capital (i.e. by borrowing an extra 22% of cash to invest!), exposing him to a total wipeout should the value of the SP500 were to drop by 60% as it did at the worst point of the 2008 financial crisis!

Also interesting to note, is that the return of a 100% investment in US 10 Years or in gold would have returned so far from a 15% investment in Bitcoin, that there’s no need to figure out how much would be necessary to borrow to reach the same level of performance…


15% Bitcoin + 85% Cash@+1.55% (US FED rate)

Analysis period: Jan.1st, 2015 – Dec.24th, 2019 – Daily basis.


Same observations as with the European investor.




Even if past performance is not a guarantee of future results, we have illustrated the potential of mixing an asset with a highly asymmetrical risk/return with cash in terms of risk and return under various hypothesis of cash yield.

As I explained to my cousin John, I would personally not invest passively more than 5% of my portfolio in Bitcoin, but rather invest in an actively managed strategy in order to enhance the native return/risk asymmetry of Bitcoin and other Digital Assets.

If like my uncle or cousin, you’re wondering what to do with your investment portfolio in 2020, feel free to contact ExoAlpha!