Investing With Cryptocurrencies – Evaluating the Potential of Portfolio Allocation Strategies

41 Pages Posted: 7 Nov 2018 Last revised: 16 Nov 2018

See all articles by Alla Petukhina

Alla Petukhina

Humboldt University of Berlin - Institute for Statistics and Econometrics

Simon Trimborn

National University of Singapore (NUS) - Department of Mathematics

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Hermann Elendner

Humboldt University of Berlin - School of Business and Economics

Date Written: October 24, 2018

Abstract

The market capitalization of cryptocurrencies has risen rapidly during the last few years. Despite their high volatility, this fact has spurred growing interest in cryptocurrencies as an alternative investment asset for portfolio and risk management. We characterise the effects of adding cryptocurrencies in addition to traditional assets to the set of eligible assets in portfolio management. 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 the frequently low liquidity of cryptocurrency markets we incorporate the LIBRO method, which gives suitable liquidity constraints. Our results show that cryptocurrencies can improve the risk-return profile of portfolios. In particular, cryptocurrencies are more useful for portfolio strategies with higher target returns; they do not play a role in minimum-variance portfolios. However, a maximum-diversification strategy (maximising the Portfolio Diversification Index, PDI) draws appreciably on cryptocurrencies, and spanning tests clearly indicate that cryptocurrency returns are non-redundant additions to the investment universe.

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 K. and Elendner, Hermann, Investing With Cryptocurrencies – Evaluating the Potential of Portfolio Allocation Strategies (October 24, 2018). Available at SSRN: https://ssrn.com/abstract=3274193 or http://dx.doi.org/10.2139/ssrn.3274193

Alla Petukhina (Contact Author)

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Simon Trimborn

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany
+49 30 2093 5631 (Phone)
+49 30 2093 5649 (Fax)

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

Hermann Elendner

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

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