Cryptocurrencies in portfolios: return–liquidity trade-off around China forbidding initial coin offerings

ABSTRACT

We examine diversification when cryptocurrencies are included in investment portfolios, around China prohibiting initial coin offerings on 4 September 2017. We discover, once we account for liquidity, that all portfolio diversification benefits of cryptocurrencies are eliminated.

KEYWORDS:

• Cryptocurrency
• liquidity
• portfolio returns
• bid-ask spread
• Amihud ratio

JEL CLASSIFICATION:

• G11
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We also tried alternative event window, and the results remain intact.

² For robustness, we repeat the econometric analysis for the largest 50 cryptocurrencies. The results (not reported) are quantitatively similar and are available from the authors upon request.