Efficient Crypto Frontier

I have had a few conversations and listened to a few podcasts where some people are confused by the crypto-markets dropping along with stocks in response to interest rates and inflation. I’m not an expert, but I am willing to play one today.

My mental model for this is simple – capital asset pricing model (CAPM) / efficient frontier + a belief that institutions invest in crypto. Institutions investing in crypto, I have strongly suspected, resulted in price increases of all coins. If these institutions have a target expected return, CAPM says that each investor set has a mix of risk-free returns and the market (including crypto) to get that return at the lowest possible risk. As risk-free rates go up, the slope of the CAPM line reduces, and the needed risk for a target return reduces. This drives asset allocations from riskier assets to risk-free and less risky assets. Hence the drop in demand for crypto by institutions and large price drops.

No idea if this is a true story. It is just my story for now.