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Optimization of Special Cryptocurrency Portfolios

Title data

Schellinger, Benjamin:
Optimization of Special Cryptocurrency Portfolios.
In: The Journal of Risk Finance. Vol. 21 (2020) Issue 2 . - pp. 127-157.
ISSN 1526-5943

Official URL: Volltext

Project information

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Project's official title
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Projektgruppe WI BLockchain-Labor
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Abstract in another language

Purpose – This paper aims to elaborate on the optimization of two particular cryptocurrency portfolios in a mean-variance framework. In general, cryptocurrencies can be classified to 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.
Design/methodology/approach – Against this backdrop, this empirical study distinguishes, in particular, between pure coin and token portfolios. Both portfolios are optimized by maximizing the Sharpe ratio and, subsequently, compared with alternative portfolio strategies. Findings – The empirical findings demonstrate that the maximum utility portfolio of coins, with a risk
aversion of λ = 10, outweighs alternative frameworks. The portfolios optimized by maximizing the Sharpe ratio for both coins and tokens indicate a rather poor performance. Testing the maximized utility for different levels of risk aversion confirms the findings of this empirical study and confers themmore robustness. Research limitations/implications – Further investigation is strongly recommended as tokens represent a new phenomenon in the cryptocurrency universe, for which only a limited amount of data are available, which restricts the sampling. Furthermore, future study is to include more sophisticated optimizationmodels using different constraints in portfolio creation. Practical implications – In light of the persistently substantial volatility in cryptocurrency markets, 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. Originality/value – 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 data

Item Type: Article in a journal
Refereed: Yes
Keywords: Portfolio diversification; Bitcoin; Sharpe ratio; Portfolio optimization; Cryptocurrencies; Markowitz
Institutions of the University: Faculties > Faculty of Law, Business and Economics > Department of Business Administration
Research Institutions
Research Institutions > Affiliated Institutes
Research Institutions > Affiliated Institutes > FIM Research Center Finance & Information Management
Faculties > Faculty of Law, Business and Economics
Result of work at the UBT: Yes
DDC Subjects: 000 Computer Science, information, general works > 004 Computer science
300 Social sciences > 330 Economics
Date Deposited: 09 Dec 2020 08:21
Last Modified: 09 Dec 2020 08:21