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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

Bjordal, Andreas; Opdahl, Espen
Master thesis
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URI
http://hdl.handle.net/11250/2487326
Date
2017
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  • Master Thesis [3258]
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.

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