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Re-evaluating portfolio diversification and design using cryptocurrencies: Are decentralized cryptocurrencies enough?

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  • Khaki, Audil
  • Prasad, Mason
  • Al-Mohamad, Somar
  • Bakry, Walid
  • Vo, Xuan Vinh

Abstract

This paper investigates the portfolio diversification potential of a pool of cryptocurrencies classified based on their degree of leadership. We employ the mean-variance and the higher-order moments optimization approaches to evaluate the diversification potential of centralized and decentralized cryptocurrencies across multiple frameworks. While theoretical implications of the mean-variance and the higher-order moments optimization approaches are similar, our results suggest that the latter provides a more precise portfolio allocation strategy because it considers investor risk-aversion for each moment. Furthermore, we find that extending the pool of cryptocurrencies achieves marginal diversification benefits due to considerable co-movements among the cryptocurrencies. Moreover, we find that decentralized cryptocurrencies offer greater diversification potential than centralized cryptocurrencies, although centralized cryptocurrencies carry some diversification potential during alt-seasons. In order of their weights, Bitcoin, Chainlink, and Ethereum (all decentralized) offer the highest contribution to portfolio diversification across most portfolio frameworks, while Ethereum offers greater diversification benefits during the alt-seasons.

Suggested Citation

  • Khaki, Audil & Prasad, Mason & Al-Mohamad, Somar & Bakry, Walid & Vo, Xuan Vinh, 2023. "Re-evaluating portfolio diversification and design using cryptocurrencies: Are decentralized cryptocurrencies enough?," Research in International Business and Finance, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:riibaf:v:64:y:2023:i:c:s0275531922002094
    DOI: 10.1016/j.ribaf.2022.101823
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    Keywords

    Bitcoin; Altcoins; Decentralized cryptocurrencies; Centralized cryptocurrencies; Portfolio optimization; Portfolio diversification;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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