Cryptocurrency-Portfolios in a Mean-Variance Framework

Abstract We apply the Markowitz mean-variance framework in order to assess risk-return benefits of cryptocurrency-portfolios. Using daily data of the 500 most capitalized cryptocurrencies for the time span 1/1/2015 to 12/31/2017, we relate risk and return of different mean-variance portfolio strategies to single cryptocurrency investments and two benchmarks, the naively diversified portfolio and the CRIX. In an out-of-sample analysis accounting for transaction cost we find that combining cryptocurrencies enriches the set of ‘low’-risk cryptocurrency investment opportunities. In terms of the Sharpe ratio and certainty equivalent returns, the 1/N-portfolio outperforms single cryptocurrencies and more than 75% of mean-variance optimal portfolios.