The Diversification Benefits of Cryptocurrencies in Multi-Asset Portfolios: Cross-Country Evidence

42 Pages Posted: 2 Feb 2021

See all articles by Jefferson Colombo

Jefferson Colombo

Sao Paulo School of Economics (FGV EESP)

Fernando Cruz

Secretary of Planning, State of Rio Grande do Sul

Luis Paese

SICREDI Cooperative Bank

Renan Cortes

Agibank Commercial Bank

Date Written: January 23, 2021

Abstract

Using a sample of 21 developing and developed countries, we analyze whether a well-diversified investor of traditional assets (stocks, bonds, real estate, and commodities) may benefit from investing in cryptocurrencies. Country-specific analyses indicate that cryptocurrencies usually fit in the tangent portfolio (maximum Sharpe ratio) but no -- or very little -- in the minimum variance portfolio (MVP). Out-of-sample analysis indicates that even global portfolios that already benefits from international diversification may enjoy investing marginally in cryptocurrencies: mean-variance optimal and naive with cryptocurrencies outperformed otherwise identical portfolios in terms of risk-adjusted returns. Besides, exchange rate movements do not drive this better performance -- it occurs for both local (all returns denominated in the local currency) and global perspectives (all returns in U.S. Dollars). We also find that cryptocurrencies' diversification benefits occur both before and after the COVID-19 pandemics, with the 1/N portfolio with cryptocurrencies presenting the higher risk-adjusted returns. Our paper adds to the literature by analyzing the marginal effects of adding cryptocurrencies on a sample of developing and developed economies and considering up-to-date data following the COVID-19 crisis.

Keywords: Cryptocurrencies, Diversification benefits, Portfolio optimization, Digital assets, Bitcoin, Alternative investments, Diversification after COVID-19

JEL Classification: G11, G15, F21, F65

Suggested Citation

Colombo, Jefferson and Cruz, Fernando and Paese, Luis and Cortes, Renan, The Diversification Benefits of Cryptocurrencies in Multi-Asset Portfolios: Cross-Country Evidence (January 23, 2021). Available at SSRN: https://ssrn.com/abstract=3776260 or http://dx.doi.org/10.2139/ssrn.3776260

Jefferson Colombo (Contact Author)

Sao Paulo School of Economics (FGV EESP) ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://eesp.fgv.br/integrante/jefferson-colombo

Fernando Cruz

Secretary of Planning, State of Rio Grande do Sul ( email )

Porto Alegre
Brazil

Luis Paese

SICREDI Cooperative Bank ( email )

Porto Alegre
Brazil

Renan Cortes

Agibank Commercial Bank ( email )

Porto Alegre
Brazil

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