Abstract
The cryptocurrency market has witnessed significant growth in the past few months. The emergence of hundreds of new digital currencies and the huge increase in the prices of their leading representatives have attracted a lot of attention from investors. However, the financial characteristics of the cryptocurrency markets have not been systematically evaluated yet. As a consequence, there is currently no consensus on whether cryptocurrencies constitute an individual asset class or if they share substantial similarities to stocks, bonds, commodities or foreign exchange. Based on Markowitz et al. (2017) this paper aims to fill this lack of research by evaluating the cryptocurrency market based on seven requirements of an individual asset class. The authors find that the cryptocurrency market distinguishes itself remarkably from established asset classes in terms of risk and return. Additionally, the low correlation between the cryptocurrency markets and these established asset classes induces a diversification potential for investors, leading to more favorable risk/return profiles of their portfolios. But also the emergence of investment services and products provided by the financial industry and the increasingly cost-effective access to cryptocurrencies corroborate the conclusion that cryptocurrencies can be seen as an individual asset class.
Highlights
Digitalization is considered an opportunity to counteract the pressure on the financial industry
The emergence of investment services and products provided by the financial industry and the increasingly cost-effective access to cryptocurrencies corroborate the conclusion that cryptocurrencies can be seen as an individual asset class
This section aims to shed some light on the legitimacy of cryptocurrencies as an individual asset class
Summary
Digitalization is considered an opportunity to counteract the pressure on the financial industry. FinTech, as the innovative spearhead of digitalization, benefits from this situation by acting as a provider or integrator of new technologies, products and services for established financial institutions (Ankenbrand, Dietrich, & Bieri, 2017) One of these innovations which has enjoyed a lot of attention from the financial industries in the past few months are cryptographic tokens or cryptocurrencies. Apart from Bitcoin, other cryptocurrencies such as Ethereum, Bitcoin Cash, Ripple, Litecoin, NEM, IOTA, NEO, Dash, and Ethereum Classic, have all reached a significant market capitalization of more than USD 1 billion (CoinMarketCap, 2017) These cryptocurrencies have increasingly found their way into mainstream financial news and continuously come into the focus of financial institutions, investors and regulators. The quantitative evaluation starts with the development of a cryptocurrency index, which enables a positioning of the cryptocurrency market into the existing asset universe
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