Investments in Cryptocurrencies: Handle with Care!

Abstract

Asset pricing models and investment styles have been researched intensively in equities, bonds, FX, and commodities. However, a new asset class has emerged since the end of 2008, namely, cryptocurrencies such as Bitcoin and Ethereum, among others. The author uses an extensive data set of over 1,500 cryptocurrencies and shows that almost none of the traditional investment styles such as momentum or defensive appear to be successful in this young asset class. Cryptocurrencies are also independent from the macroeconomic environment and cannot be explained by a standard asset pricing model. A cryptocurrency specific model yields clearly better results. In addition, the whole cryptocurrency space is dominated by only a few individual digital coins. Equally weighted mean monthly returns appear to be random with low or even no correlation with traditional asset classes such as US equities and global FX.

TOPICS: Currency, portfolio construction, risk management, performance measurement