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What are the limitations of using the Kelley criterion in determining position sizing for cryptocurrency investments?

avatarrhhykuDec 26, 2021 · 3 years ago1 answers

What are the potential drawbacks and limitations of relying on the Kelley criterion as a method for determining the appropriate position size for cryptocurrency investments?

What are the limitations of using the Kelley criterion in determining position sizing for cryptocurrency investments?

1 answers

  • avatarDec 26, 2021 · 3 years ago
    The Kelley criterion can be a useful tool for determining position sizing in cryptocurrency investments, but it is not without its limitations. One of the main drawbacks is that it assumes a constant probability of success and a constant return on investment. However, in the cryptocurrency market, these parameters can vary significantly over time. Cryptocurrencies are highly volatile and subject to sudden price swings, which can make it difficult to accurately estimate the probability of success and the potential return. Additionally, the Kelley criterion does not take into account factors such as liquidity constraints, transaction costs, and market impact, which can have a significant impact on the actual performance of a trading strategy. Therefore, while the Kelley criterion can provide a starting point for position sizing, it should be used in conjunction with other risk management techniques and adapted to the specific characteristics of the cryptocurrency market.