Cryptocurrencies: Applications and Investment Opportunities

Journal of Capital Markets Studies, 3.2, 98-112, 2019

Posted: 3 Feb 2020

See all articles by A. Can Inci

A. Can Inci

Bryant University

Rachel Lagasse

The MathWorks, Inc.

Date Written: 2019

Abstract

Purpose – This study investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed from traditional asset classes. Using a long sample period covering not only the large value increases but also the dramatic declines during the beginning of 2018, the study aims to provide a more complete analysis of the dynamic nature of cryptocurrencies as individual investment opportunities, and as components of optimal portfolios.

Design/methodology/approach – The mean-variance optimization technique of Merton (1990) is applied to develop the risk and return characteristics of the efficient portfolios, along with the optimal weights of the asset class components in the portfolios.

Findings – We provide evidence that as a single investment, the best cryptocurrency is Ripple, followed by Bitcoin and Litecoin. Furthermore, cryptocurrencies have a useful role in the optimal portfolio construction and in investments, in addition to their original purposes for which they were created. Bitcoin is the best cryptocurrency enhancing the characteristics of the optimal portfolio. Ripple and Litecoin follow in terms of their usefulness in an optimal portfolio as single cryptocurrencies. Including all these cryptocurrencies in a portfolio generates the best (most optimal) results. Contributions of the cryptocurrencies to the optimal portfolio evolve over time. Therefore, the results and conclusions of this study have no guarantee for continuation in an exact manner in the future. However, the increasing popularity and the unique characteristics of cryptocurrencies will assist their future presence in investment portfolios.

Originality/value – This is one of the first studies that examine the role of popular cryptocurrencies in enhancing a portfolio composed of traditional asset classes. The sample period is the largest that has been used in this strand of the literature, and allows comparing optimal portfolios in early/recent subsamples, and during the pre-/post-cryptocurrency crisis periods.

Keywords: Cryptocurrencies, Bitcoin, Ripple, Litecoin, Portfolio optimization, Markowitz

JEL Classification: G01, G11, O16, O33

Suggested Citation

Inci, Ahmet Can and Lagasse, Rachel, Cryptocurrencies: Applications and Investment Opportunities (2019). Journal of Capital Markets Studies, 3.2, 98-112, 2019. Available at SSRN: https://ssrn.com/abstract=3516774

Ahmet Can Inci (Contact Author)

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

Rachel Lagasse

The MathWorks, Inc. ( email )

3 Apple Hill Drive
Natick, MA 01760-2098
United States

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