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Re-evaluating portfolio diversification and design using cryptocurrencies: Are decentralized cryptocurrencies enough?

Audil Khaki, Mason Prasad, Somar Al-Mohamad, Walid Bakry () and Xuan Vinh Vo

Research in International Business and Finance, 2023, vol. 64, issue C

Abstract: This paper investigates the portfolio diversification potential of a pool of cryptocurrencies classified based on their degree of leadership. We employ the mean-variance and the higher-order moments optimization approaches to evaluate the diversification potential of centralized and decentralized cryptocurrencies across multiple frameworks. While theoretical implications of the mean-variance and the higher-order moments optimization approaches are similar, our results suggest that the latter provides a more precise portfolio allocation strategy because it considers investor risk-aversion for each moment. Furthermore, we find that extending the pool of cryptocurrencies achieves marginal diversification benefits due to considerable co-movements among the cryptocurrencies. Moreover, we find that decentralized cryptocurrencies offer greater diversification potential than centralized cryptocurrencies, although centralized cryptocurrencies carry some diversification potential during alt-seasons. In order of their weights, Bitcoin, Chainlink, and Ethereum (all decentralized) offer the highest contribution to portfolio diversification across most portfolio frameworks, while Ethereum offers greater diversification benefits during the alt-seasons.

Keywords: Bitcoin; Altcoins; Decentralized cryptocurrencies; Centralized cryptocurrencies; Portfolio optimization; Portfolio diversification (search for similar items in EconPapers)
JEL-codes: C58 D81 G1 G11 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.ribaf.2022.101823

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