Investment in Cryptocurrencies: lessons for asset pricing and portfolio theory

ABSTRACT

We consider the performance of cryptocurrencies in the light of fundamental asset pricing and portfolio theory. We observe how a traditional focus on reducing asset return volatility with Markowitz diversification misses the significance of such volatility for growth. The recognition that asset growth is more likely subject to exponential or continuously compounding growth characteristics reveals that asset volatility can be exploited both across assets and across investment periods to deliver superior returns.

KEYWORDS:

• Cryptocurrency
• portfolio theory
• asset pricing
• equally-balanced portfolio

JEL CLASSIFICATION:

• O16
• G11
• G12

Acknowledgments

We would like to acknowledge our colleagues at RMIT University for helping us improve the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Authors’ contributions

Authors’ contributions are distributed based on the authors’ order.

Declarations

Data and material used in the study will be available upon request.

Notes

¹ The idea that the benefits of equal-weighting can be achieved by an allocation of assets that is uncorrelated with market capitalized prices has been advanced by Arnott, Hsu, and Moore (2005), which the authors refer to as a strategy of fundamental indexation (FI). They argued that a back-tested portfolio that weighted large firms in terms of fundamental indexation outperformed a capital-weighted index such as the S&P 500, by about two percent per year. The paper provoked some considerable controversy, with papers by Perold (2007) and Kaplan (2008) (in the same Financial Analysts journal) andJune robustly opposing the paper’s finding (before receiving support from such as Dempsey 2012).

Additional information

Funding

No funding is used in this paper.