Benefits of investing in cryptocurrencies when liquidity is a factor

David Moreno, Marcos Antoli and David Quintana

Research in International Business and Finance, 2022, vol. 63, issue C

Abstract: Previous studies find that cryptocurrencies offer diversification benefits when are allocated in a portfolio with traditional assets. However, they disregard the impact of liquidity and the fact, that investors dislike the illiquidity assets. The goal of this paper is to evaluate the cost of liquidity preferences for portfolios that combine traditional assets and cryptocurrencies. We find that, once liquidity is considered, those portfolios with the highest expected return become unavailable and the rest suffer losses in performance of 10–25% in the efficient frontier. If we focus on a traditional investor who limits exposure to cryptocurrencies, the benefits of adding cryptocurrencies to the investor’s portfolio are reduced by about 15%, depending on the liquidity measure analysed.

Keywords: Cryptocurrencies; Liquidity; Portfolio optimization; Bitcoin; Efficient frontier (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:63:y:2022:i:c:s0275531922001386

DOI: 10.1016/j.ribaf.2022.101751

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