Balancing Cryptoassets and Gold: A Weighted-Risk-Contribution Index for the Alternative Asset Space

Aikaterini Koutsouri (), Francesco Poli (), Elise Alfieri (), Michael Petch (), Walter Distaso () and William Knottenbelt
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Aikaterini Koutsouri: Imperial College London
Francesco Poli: Imperial College London
Elise Alfieri: CERAG - Centre d'études et de recherches appliquées à la gestion - UGA [2016-2019] - Université Grenoble Alpes [2016-2019]
Walter Distaso: Imperial College London
William Knottenbelt: Imperial College London

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Abstract: Bitcoin is foremost amongst the emerging asset class known as cryptoassets. Two noteworthy characteristics of the returns of non-stablecoin cryptoassets are their high volatility, which brings with it a high level of risk, and their high intraclass correlation, which limits the benefits that can be had by diversifying across multiple cryptoassets. Yet cryptoassets exhibit no correlation with gold, a highly-liquid yet scarce asset which has proved to function as a safe haven during crises affecting traditional financial systems. As exemplified by Shannon's Demon, a lack of correlation between assets opens the door to principled risk control through so-called volatility harvesting involving periodic rebalancing. In this paper we propose an index which combines a basket of five cryp-toassets with an investment in gold in a way that aims to improve the risk profile of the resulting portfolio while preserving its independence from mainstream financial asset classes such as stocks, bonds and fiat currencies. We generalise the theory of Equal Risk Contribution to allow for weighting according to a desired level of contribution to volatility. We find a crypto-gold weighting based on Weighted Risk Contribution to be historically more effective in terms of Sharpe Ratio than several alternative asset allocation strategies including Shannon's Demon. Within the crypto-basket, whose constituents are selected and rebalanced monthly, we find an Equal Weighting scheme to be more effective in terms of the same metric than a market capitalisation weighting.

Date: 2019-05-06
New Economics Papers: this item is included in nep-rmg
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Published in MARBLE 2019, May 2019, Santorini, Greece. ⟨10.1007/978-3-030-37110-4_15⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02952145

DOI: 10.1007/978-3-030-37110-4_15

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