What is it about?
This research aims to elaborate on the optimization of two cryptocurrency portfolios according to a mean-variance approach, consisting of exclusively (i) coins and (ii) tokens. In general, cryptocurrencies can be classified as coins and tokens where the first can be thought of as a medium of exchange, and the latter accounts for security or utility tokens depending upon its design.
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Why is it important?
The considerable volatility in cryptocurrency markets can result in great losses to investors. Hence, portfolio managers should mitigate the risk of fluctuating prices by optimizing the portfolio weights of different cryptocurrencies. The empirical findings assert that portfolio managers are advised to construct a global minimum variance portfolio. In the absence of sophisticated optimization models, private investors can invest according to the market values of cryptocurrencies. Despite minor differences in the risk and reward ratios of the portfolios tested, tokens tend to be more speculative, especially, if the Tether token is excluded, which may require enhanced supervision and investor protection by regulating authorities.
Perspectives
As the current literature investigates on diversification effects of blended cryptocurrency portfolios rather than making an explicit distinction, this paper reflects one of the first to explore the investability and role of diversifying coins and tokens using a classic Markowitz approach. Further investigation is strongly recommended as tokens represent a new phenomenon in the cryptocurrency universe, for which only a limited amount of data is available, which restricts the sampling. Furthermore, future study is to include more sophisticated optimization models using different constraints in portfolio creation.
Benjamin Schellinger
Read the Original
This page is a summary of: Optimization of special cryptocurrency portfolios, The Journal of Risk Finance, May 2020, Emerald,
DOI: 10.1108/jrf-11-2019-0221.
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