Cryptocurrency: A New Investment Opportunity?

Abstract

Bitcoin was the first cryptocurrency using blockchain and has been the market leader since the first bitcoin was mined in 2009. After the birth of bitcoin in the Genesis Block, more than 1000 altcoins and crypto-tokens have been created with at least 919 trading actively on unregulated or registered exchanges. This entire class of cryptocurrency 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 it is in terms of its risk and return structure? This paper sets out to help the readers to understand cryptocurrencies, and to explore the risk and return characteristics using a portfolio of cryptocurrency represented by the CRIX Index. Substantial discussions are centred on bitcoin and its close variants. Some questions are raised about the potential of cryptocurrencies as an investment class. Results show that the correlations between the cryptocurrencies and traditional assets are low, and incorporation of CRIX index will improve the performance of the portfolio that consists mainly of mainstream assets. Sentiment analysis also indicates the CRIX index has a relatively high Sharpe ratio. While we may view the results with care, a new form of financing for crypto 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 Offering (ICO) or Initial Token Sales (ITS).