Investing with Cryptocurrencies – evaluating their potential for portfolio allocation strategies

Quantitative Finance (2021): 1-29.

64 Pages Posted: 7 Nov 2018 Last revised: 28 Sep 2021

See all articles by Alla Petukhina

Alla Petukhina

University of Applied Sciences for Engineering and Economics (HTW Berlin), School of Computing, Communication and Business

Simon Trimborn

University of Amsterdam - Amsterdam School of Economics (ASE); University of Amsterdam - CeNDEF

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin; Charles University; National Yang Ming Chiao Tung University; Asian Competitiveness Institute

Hermann Elendner

Austrian Blockchain Center (ABC Research); UCL Centre for Blockchain Technologies

Date Written: October 23, 2020

Abstract

Cryptocurrencies (CCs) have risen rapidly in market capitalization over the last years. Despite striking price volatility, their high average returns have drawn attention to CCs as alternative investment assets for portfolio and risk management. We investigate the utility gains for different types of investors when they consider cryptocurrencies as an addition to their portfolio of traditional assets. We consider risk-averse, return-seeking as well as diversification-preferring investors who trade along with different allocation frequencies, namely daily, weekly or monthly. Out-of-sample performance and diversification benefits are studied for the most popular portfolio-construction rules, including mean-variance optimization, risk-parity, and maximum-diversification strategies, as well as combined strategies. To account for low liquidity in CC markets, we incorporate liquidity constraints via the LIBRO method. Our results show that CCs can improve the risk-return profile of portfolios. In particular, a maximum-diversification strategy (maximizing the Portfolio Diversification Index, PDI) draws appreciably on CCs, and spanning tests clearly indicate that CC returns are non-redundant additions to the investment universe. Though our analysis also shows that illiquidity of CCs potentially reverses the results.

Keywords: Cryptocurrency, CRIX, Investments, Portfolio Management, Asset Classes, Blockchain, Bitcoin, Altcoins, DLT

JEL Classification: C01, C58, G11

Suggested Citation

Petukhina, Alla and Trimborn, Simon and Härdle, Wolfgang Karl and Elendner, Hermann, Investing with Cryptocurrencies – evaluating their potential for portfolio allocation strategies (October 23, 2020). Quantitative Finance (2021): 1-29., Available at SSRN: https://ssrn.com/abstract=3274193 or http://dx.doi.org/10.2139/ssrn.3274193

Alla Petukhina (Contact Author)

University of Applied Sciences for Engineering and Economics (HTW Berlin), School of Computing, Communication and Business ( email )

Treskowallee 8
Berlin, 10313
Germany

Simon Trimborn

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

National Yang Ming Chiao Tung University ( email )

No. 1001, Daxue Rd. East Dist.
Hsinchu City 300093
Taiwan

Asian Competitiveness Institute ( email )

Singapore

Hermann Elendner

Austrian Blockchain Center (ABC Research) ( email )

Favoritenstraße 111
Vienna, Vienna 1100
Austria

UCL Centre for Blockchain Technologies ( email )

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