Is Bitcoin Enough? An Analysis of Passive Cryptocurrency Investments

Abstract

Investing in cryptocurrencies has become a mainstream topic in asset management. The number of cryptocurrencies is vast (CoinMarketCap states that there are over 23,000), and continues to rise, so selecting solid investments is key. The authors analyze an approach of avoiding currency-picking in favor of passive investment strategies in cryptocurrencies. A pure-Bitcoin investment is compared to six portfolios, consisting of the top 2, 3, 5, 10, and 15 cryptocurrencies by market cap (including Bitcoin), as well as a portfolio of the top 14 cryptocurrencies (excluding Bitcoin). They test for differences in the average monthly returns; average Jensen’s alphas, with MSCI World as the market portfolio; and daily volatilities. The portfolios showed neither a significantly better return nor Jensen’s alpha compared to the Bitcoin-only investment. In some cases, significant volatility differences favoring a pure-Bitcoin investment were found. Considering the cost of allocating to multiple cryptocurrencies, the message of this article is that a pure-Bitcoin investment is adequate for adding exposure to crypto assets for passive investors. This research expands on previous work on the correlation and diversification properties of specific Altcoins in relation to Bitcoin. The authors extend previous research comparing investment returns and risks from different typical passive-investment strategies that are applied to cryptocurrencies (Top <italic>n</italic>) in a setting that avoids hindsight and survivorship bias.