Economic Evaluation of Cryptocurrency Investment

Abstract

This study proposes a method to enhance cryptocurrency portfolio returns constructed by forecast models. We forecast returns on four liquid cryptocurrencies and determine the weights on the cryptocurrencies based upon a dynamic allocation framework. We assess the performances of the portfolios using the performance fee measures. Our results present that the proposed portfolios outperform the benchmark portfolio. The economic gain for an investor is sensitive to a change in the risk aversion parameter, which contrasts to the studies of exchange rates.

Keywords: Cryptocurrency, Bitcoin, Portfolio evaluation, Forecast model, Risk aversion

JEL Classification: G10, G11, G17