Faculty of Business Brown Bag Seminars | Finance | Dr. Umut Gökçen

Faculty of Business Brown Bag Seminars | Finance | Dr. Umut Gökçen

25.10.2024

13:30-15:00
AB2 345

Dr. Umut Gökçen

Rules-Based Crypto Asset Portfolios 

Despite the ever-growing number of coins and exchanges, we know little about how portfolios of crypto assets behave compared to Bitcoin. Due to the short history of cryptocurrency data, previous research has focused on weekly returns and found evidence of size and momentum effects in the cross-section, however it is not clear whether these strategies can be implemented in investment portfolios with longer time horizons. Using a new and highly accurate dataset with more restrictive filtering on trading volume, I show that market capitalization is the strongest determinant of cryptocurrency returns with monthly rebalancing. The smallest quintile of coins generates an average of 27% return per month and beats Bitcoin by about 14% per month in the 2017-2023 period. As expected, liquidity plays a big role here – an equal-weighted portfolio of the lowest dollar volume quintile coins can also generate above 20% returns per month. Similar to equity markets, I find that coins with high volatility or high daily maximum return have significantly lower returns (even negative returns if 2017 is excluded), pointing to a lottery preference effect. I find no evidence of momentum or reversal at any monthly lookback period.