Cryptocurrency-Portfolios in a Mean-Variance Framework

Abstract

By the end of 2017, 27 cryptocurrencies topped a market capitalization of one billion USD. Bitcoin is still shaping market and media coverage, however, recently we faced a vibrant rise of other currencies. As a result, 2017 has also witnessed the advent of a large number of cryptocurrency-funds. In this paper, we use Markowitz' mean-variance framework in order to assess risk-return-benefits of cryptocurrency-portfolios. We relate risk and return of different portfolio strategies to single cryptocurrency investments. In an out-of-sample analysis accounting for transaction cost we find that combining cryptocurrencies in a portfolio enriches the set of 'low'-risk cryptocurrency investment opportunities.

Keywords: cryptocurrencies, portfolio optimization, Markowitz, naive diversification

JEL Classification: G11