Practical Applications of Beyond Bitcoin: A Statistical Comparison of Leading Cryptocurrencies and Fiat Currencies and Their Impact on Portfolio Diversification

Practical Applications Summary

In Beyond Bitcoin: A Statistical Comparison of Leading Cryptocurrencies and Fiat Currencies and Their Impact on Portfolio Diversification from the Summer 2019 issue of The Journal of Alternative Investments, authors Stefan Ehlers and Kolja Gauer (both at Volkswagen AG) provide a first-of-its-kind analysis of whether traditional currencies (also known as fiat currencies) and cryptocurrencies act similarly or differently with respect to their fluctuations in value and total return. The authors also explore whether mixing cryptocurrencies and fiat currencies in an investment portfolio can help diversify it and reduce the portfolio's variance. The authors find no correlation between the fluctuations in value and total return of cryptocurrencies and fiat currencies, so combining them in a mixed portfolio improves diversification. Also, only Bitcoin and XRP play an important role in reducing the variance of a pure cryptocurrency portfolio, while just a few cryptocurrencies and fiat currencies significantly reduce the variance of mixed portfolios. So, those who want to invest in cryptocurrencies and avoid major swings in value and returns should consider including a few specific currencies in their portfolio and should combine cryptocurrencies with fiat currencies in a mixed portfolio. TOPICS:Currency, statistical methods, portfolio construction