Assessment of cryptocurrencies as an asset class by their characteristics

  • Received September 28, 2017;
    Accepted July 17, 2018;
    Published August 29, 2018
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.15(3).2018.14
  • Article Info
    Volume 15 2018, Issue #3, pp. 169-181
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The cryptocurrency market has witnessed significant growth in the past few months. The emergence of hundreds of new digital currencies and the huge increase in the prices of their leading representatives have attracted a lot of attention from investors. However, the financial characteristics of the cryptocurrency markets have not been systematically evaluated yet. As a consequence, there is currently no consensus on whether cryptocurrencies constitute an individual asset class or if they share substantial similarities to stocks, bonds, commodities or foreign exchange. Based on Markowitz et al. (2017) this paper aims to fill this lack of research by evaluating the cryptocurrency market based on seven requirements of an individual asset class. The authors find that the cryptocurrency market distinguishes itself remarkably from established asset classes in terms of risk and return. Additionally, the low correlation between the cryptocurrency markets and these established asset classes induces a diversification potential for investors, leading to more favorable risk/return profiles of their portfolios. But also the emergence of investment services and products provided by the financial industry and the increasingly cost-effective access to cryptocurrencies corroborate the conclusion that cryptocurrencies can be seen as an individual asset class.

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    • Figure 1. Total market capitalization of cryptocurrencies as of August 14, 2017, in USD bn
    • Figure 2. Cryptocurrency index from April 2013 to mid-August 2017, weekly basis
    • Figure 3. Efficient frontiers with and without the cryptocurrency market
    • Figure 4. Bid-ask spread of Bitcoin on the Bitfinex exchange, weekly data
    • Table 1. Components of the cryptocurrency index as of August 13, 2017
    • Table 2. Asset classes and their proxies
    • Table 3. Annual risk/return profiles of established asset classes and cryptocurrencies, period from April 2013 to mid-August 2018
    • Table 4. Correlation Matrix. Index proxies: S&P500 Index (Stocks), Bloomberg Barclays US Aggregate Bond Index (Bonds), Bloomberg Commodity Index (Commodities), Trade-weighted U.S. Dollar Broad Index (Foreign Exchange), and Cryptocurrency Index (Cryptocurr
    • Table 5. Comparison of tangency portfolios, annual performance