Practical Applications of Investments in Cryptocurrencies: Handle with Care!

Practical Applications Summary

In Investments in Cryptocurrencies: Handle with Care! from the Summer 2019 issue of The Journal of Alternative Investments, author Tobias N. Glas (of the Department of Finance at the University of Bremen, Germany) uses an extensive data set to analyze the new asset class of cryptocurrencies, such as Bitcoin. He demonstrates that the investment performance of cryptocurrencies has little or no correlation with the performance of traditional markets and investments, or the macroeconomic environment in general.

The mean monthly investment returns of cryptocurrencies are basically random, and only a few of the traditional investment styles produce positive results when applied to cryptocurrencies. Therefore, traditional market mechanics cannot yet be applied to cryptocurrency markets—so the author advises investors to handle cryptocurrencies with care. On the other hand, a few individual digital coins dominate the cryptocurrency market, and they have posted high average returns for investors who bought and held them. Also, the investment performance of cryptocurrencies is not influenced by that of stocks or other investments—and so cryptocurrencies will not necessarily go down if the stock market goes down. So adding cryptocurrencies to a portfolio can make it more diversified.

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