Cryptocurrency: A new investment opportunity?

• Main Authors: LEE, David Kuo Chuen, GUO, Li, WANG, Yu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Cryptocurrency; Bitcoin; Altcoin; Alternative Investment; Crypto-Token; Finance and Financial Management; Technology and Innovation
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5784; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6783/viewcontent/Cryptocurrency__A_New_Investment_Opportunity_afv.pdf
• Institution: Singapore Management University

Bitcoin was the first cryptocurrency to use blockchain and has been the market leader since the first bitcoin was mined in 2009. After the birth of Bitcoin with the genesis block, more than 1,000 altcoins and crypto-tokens have been created, with at least 919 trading actively on unregulated or registered exchanges. This entire class of cryptocurrencies and tokens has been classified by some tax authorities as having the same status as commodities. If cryptocurrency is viewed in the same class as commodities, how different is it in terms of its risk and return structure? This article sets out to help readers understand cryptocurrencies and to explore their risk and return characteristics using a portfolio of cryptocurrency represented by the Cryptocurrency Index (CRIX). Substantial discussions are centered on Bitcoin and its close variants. Some questions are raised about the potential of cryptocurrencies as an investment class. Results show that the return correlations between cryptocurrencies and traditional assets are low and that adding CRIX returns to a traditional asset portfolio improves risk–return performance. Sentiment analysis also indicates the CRIX has a relatively high Sharpe ratio. Although we should view the results with care, a new form of financing for cryptocurrency and blockchain start-ups is born. The disruption brought about by Bitcoin may be felt beyond payments through what is known as initial crypto-token offerings or initial token sales.