Investing in the Cryptocurrency Market: Analyzing the diversification effects of cryptocurrencies in a well-diversified portfolio

Abstract

In our paper we explore the effects of investing in cryptocurrencies, which currently compose an underdeveloped financial market. In line with previous research, we find solid improvements of an investor’s portfolio when adding Bitcoin to a well-diversified portfolio. We furthermore show that later generations of cryptocurrencies Stellar Lumen and Litecoin provide solid improvements when included within an investor’s portfolio. Similar diversification effects for cryptocurrencies like Monero and Ripple are found. By using a Mean-Variance analysis in combination with Monte Carlo methods, we reveal the added value of investing in the cryptocurrency market.