Can cryptocurrencies enhance portfolio performance?

Abstract: This thesis utilizes mean-variance analysis and Sharpe-ratio optimization to explore the possibilities of adding cryptocurrencies to enhance portfolio performance. While earlier such research has focused on Bitcoin alone, this study examines 17 of the largest cryptocurrencies, selected based on their market capitalization. In addition to examining these cryptocurrencies’ potential as investments, a brief review of the types of cryptocurrencies and each of the cryptocurrency’s distinguishing features is presented. Results show that including cryptocurrencies leads to an improved Sharpe-ratio compared to a portfolio of traditional assets only, and that there is benefit in diversifying one’s position in cryptocurrencies. It should be noted, that the rigour of these results is dependent on the assumption of normally distributed returns, which is rejected for both cryptocurrencies and traditional assets by the Anderson-Darling test of normality. Furthermore, cryptocurrencies are high-risk assets and speculative investments with limited historical data available, all factors which call for caution in drawing far-reaching conclusions. Nonetheless, the promising results of this study, warrants further research into the risk and return characteristics of not only Bitcoin but a larger set of cryptocurrencies.