Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

SFB649DP2016 038

The Cross-Section of Crypto-Currencies as Financial Assets: An Overview

Brenda López Cabrera
Franziska Schulz

Abstract:
Crypto-currencies have developed a vibrant market since bitcoin, the first crypto-currency, was created in 2009. We look at the properties of cryptocurrencies as financial assets in a broad cross-section. We discuss approaches of altcoins to generate value and their trading and information platforms. Then we investigate crypto-currencies as alternative investment assets, studying their returns and the co-movements of altcoin prices with bitcoin and against each other. We evaluate their addition to investors' portfolios and document they are indeed able to enhance the diversification of portfolios due to their little co-movements with established assets, as well as with each other. Furthermore, we evaluate pure portfolios of crypto-currencies: an equally weighted one, a value-weighted one, and one based on the CRypto-currency IndeX (CRIX). The CRIX portfolio displays lower risk than any individual of the liquid crypto-currencies. We also document the changing characteristics of the crypto-currency market. Deepening liquidity is accompanied by a rise in market value, and a growing number of altcoins is contributing larger amounts to aggregate crypto-currency market capitalization.

Keywords:
Crypto-currenciesA, ltcoins, Investment assets, Bitcoin, Blockchain, Alternative
investments, Financial risk and return

JEL Classification:
G11, G15, F31