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Bitcoin: Systematic Force of Cryptocurrency Portfolio

Cryptocurrencies represent a new type of digital asset that cannot be linked to the framework of fundamental and systematic factors of existing financial instruments of the traditional capital market. Due to the lack of strictly defined fundamental indicators, supported by the results of research by the academic community, considering cryptocurrencies as investment opportunities can put investors in a subordinate position, a situation of complete uncertainty. Cryptocurrencies and their entire technical infrastructure are still a kind of unknown to the general public. Due to this, but also the lack of a regulatory framework, investors have to rely on sometimes uncertain information gathered through various media platforms. However, regardless of the type of assets and the mentioned shortcomings, when constructing a portfolio, investors should consider the dynamics of returns of potential components of the portfolio in order to identify and quantify the assumed investment risk and define the expected return. Cryptocurrencies are based on the idea of decentralization initially introduced by bitcoin blockchain technology and as such have their own historical sequence of origin. Since bitcoin is the first digital currency based on asymmetric cryptography, the change in its value can serve as a leading indicator of the movement of the cryptocurrency market as a whole. Accordingly, this paper will formally identify and describe the performance of the cryptocurrency portfolio with different optimization goals taking into account the assumption of a significant systematic impact of bitcoin cryptocurrency on the dynamics of the value of the aggregate secondary cryptocurrency market. For this purpose, six optimization targets will be formed: MinVar, MinCVaR, MaxSR, MaxSTARR, MaxUT and MaxMean. The results of the formed portfolios will be compared with the results of portfolios with the same allocation objectives, but which include a limitation on the impact of BTC as a systematic factor. The results suggest that by controlling the exposure by factor, better overall portfolio performance can be achieved through higher returns and Sharpe Ratio in four of the six implemented optimization strategies, while in terms of absolute risk measure five out of six portfolios achieved lower overall risk. Also, the obtained results confirm that the bitcoin transaction system plays a major role in defining the future movement of the value of the secondary cryptocurrency market.

cryptocurrencies, portfolio choice, factor investing, risk management, portfolio return

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