Portfolio management : will hodling cryptos maximize investor returns?
1University of Oulu, Oulu Business School, Department of Finance, Finance
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Oulu : A. Mirajkar,
Background and Objectives: This thesis aims to investigate whether adding cryptocurrencies to a portfolio of traditional assets enhances the portfolio performance. Moreover, the previous research conducted in this area focused only on Bitcoin. This study devotes to examine the benefits of 18 cryptocurrencies together, which have been selected based on their market capitalization. Out of these 18 cryptocurrencies under study, we also aim to analyze the effects of the more recent additions in the crypto market, which is a stable coin and a utility coin, thereby making our study relevant to the present-day innovations in the crypto space. In addition to this, since the Blockchain and Cryptocurrency technology are newly founded ideations in the financial ecosystem, we scheme to provide a brief overview of this technology by taking into consideration aspects such as their advantages, disadvantages, types of blockchain and cryptocurrencies along with their working and the market players involved for their functioning. Data and Methodology: The times series data was obtained from Coinmarketcap and Yahoo Finance. The time period of research was from 01st January 2014 to 28th February 2020. We employ the Mean-Variance analysis of Markowitz (1952) and Sharpe-ratio of Sharpe (1964) and calculate the mean returns, standard deviation, and Sharpe-ratio and optimize three sets of portfolios: Maximization of Sharpe-ratio (with no short sale), Maximization of Sharpe-ratio (with short sale) and a Minimum Variance portfolio. Results: Results showcase that including cryptocurrencies in a portfolio of traditional assets, provides an improved Sharpe-ratio in comparison to the standard portfolio, which consists of traditional assets only. Moreover, on the construction of the correlation matrix, overall there is no significant correlation among the cryptocurrencies and traditional assets. Results also state that despite Bitcoin being the leader in the crypto space with a market dominance of 62%, it shows lower benefits in the portfolios constructed. However, on the other hand, we found exceptional results by the inclusion of other altcoins and Utility coin (Binance Coin). Furthermore, it should also be noted that cryptocurrencies are risky assets where, although they provide high returns than traditional assets, but they also exhibit extreme volatility. Moreover, the results are based on the limited availability of historical data for most of the cryptoassets, due to which conclusion from the results must be drawn with caution. However, cryptocurrencies have the potential to be analyzed and included for diversification benefits.
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