Low-volatility strategies for highly liquid cryptocurrencies

Abstract

Managing extreme price fluctuations in cryptocurrency markets are of central importance for investors in this market segment. Using a sample of highly liquid cryptocurrencies from January 2017 to June 2021, this paper proposes a dynamic investment strategy that selects cryptocurrencies based on their historical volatility and is complemented by a simple stop-loss rule. Our results reveal that investing in highly concentrated low volatility cryptocurrency portfolios with six to twelve months volatility look-back and holding period generate statistically significant excess returns. By including a simple stop-loss rule, the downside risk of cryptocurrency portfolios is reduced markedly, and the Sharpe ratios are improved significantly.