Portfolio optimization in the cryptocurrency market : an evaluation of the performance of momentum strategies in the cryptocurrency market and cryptocurrency’s place in an optimized investment portfolio

Abstract

In this paper, we rigorously investigate the benefit of utilizing an active investment strategy based on momentum when investing in cryptocurrencies. We also examine how including cryptocurrencies in a more traditional asset allocation can optimize an investment portfolio. First, we create strategies with the use of exponential moving averages and simple average filters to generate a trading signal. Second, we provide evidence that the active strategies receive positive return, but significantly less than the passive buy-and-hold alternative/benchmark. Third, we find evidence that including a portion of cryptocurrency in a portfolio with more traditional assets will improve the risk-adjusted return, due to low historical correlation. And fourth, we look at and evaluate the extreme volatility and risk related to cryptocurrencies and the suggested cryptocurrency bubble. Our results have important implications for portfolio managers and first-time investors alike.