cryptocurrency: a new investment opportunity?

Cryptocurrency:A New Investment

Opportunity?

PRESENTED BY

CHERYL WANG YU

R ESEA RCH FELLOW

SI N GAPOR E UN I VERS I T Y OF SOCI A L SC IEN CES

David Lee Kuo Chuen, Li Guo ang Yu Wang

Journal of Alternative Investments

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Cumulative Returns of CRIX and Traditional Asset Class

2

Outline

Cryptocurrency

Diversification Effects of Cryptocurrencies

Investor Sentiment and Portfolio

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From Centralization to Decentralization

FiatMoney

• High Transaction Fees

• Long Settlement Period

CentralizedDigital

Currency

• Loyalty points of companies or digital coins ofInternet-based platforms

• Centralized: Controlled and verified by theinstitution or legal entities

Crypto-currency

• 1st cryptocurrency: eCash in 1990s

• Double-spending problem

• Bitcoin and blockchain

• Altcoins

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Bitcoin and Altcoins

have market cap larger than $1B

Total market cap:

cryptocurrencies and crypto-tokenswere launched and traded

24h trading volume exceeds

Source: https://coinmarketcap.com/

have market cap larger than $10B

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Bitcoin and Altcoins

Rank Name Market Cap Price

1 Bitcoin $289.7B $17260.1

2 Ripple $120.3B $3.1

3 Ethereum $99.5B $1028.3

4 Bitcoin Cash $42.9B $2537.3

5 Cardano $26.5B $1.0

6 Litecoin $15.7B $286.7

7 NEM $14.6B $1.6

8 Stellar $12.5B $0.7

9 TRON $11.5B $0.2

10 IOTA $10.8B $3.9

Source: https://coinmarketcap.com/ 6

Data

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CRIX index: Tribson and Hardle (2016)

Cryptocurrencies: Research Team (Hu-berlin University, Singapore Management University, CoinGecko)

Traditional asset class: Bloomberg

Sample period: 11 August 2014 – 27 March 2017

Cryptocurrencies in the Study

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Number Cryptocurrency Symbol

Times Being Included in CRIX

1 Bitcoin BTC 32

2 Ethereum XRP 32

3 Litecoin LTC 31

4 Dash DASH 29

5 Dogecoin DOGE 28

6 Monero XMR 26

7 Bitshares BTC 26

8 MaidSafeCoin MAID 25

9 Nxt NXT 24

10 Bytecoin BCN 24

The top 10 cryptocurrencies based on the frequency with which they areincluded in the CRIX(CRypto IndeXhttp://crix.hu-berlin.de/)

Summary Statistics

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Correlation Analysis

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Static Correlation

Dynamic Conditional Correlation (DCC)

Efficient Frontier and Transition Map

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(%)

Efficient Frontier and Optimal Portfolio

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%

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Sentiment Analysis I

Investor Sentiment (Berkman et al. [2012])

Sentiment-induced overnight returns are reversed during the trading day because rational investors will come into the market to correct the mispricing

Reversal effect: retail investors will pay attention to those cryptocurrencies with extreme past returns –they will simply buy (sell) those cryptocurrencies with high (low) past returns, driving price to deviate from rational expectation. And then a strong return reversal will be observed in the next trading day.

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Sentiment Analysis II

Sentiment Proxy: Average return in the past 10 trading days as the proxy of investor sentiment for each cryptocurrency

Top 100 cryptocurrencies that have been included in CRIX

Whole sample period (11 August 2014 – 27 March2017)

Sentiment Effect

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Sentiment Portfolio Performance I

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Sentiment Portfolio Performance II

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Sentiment Portfolio Performance III

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Sentiment Portfolio Performance IV

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Mean Return

VolatilitySharpe Ratio

Information Ratio

Maximum Drawdown

S&P 500 0.0003 0.0084 0.0354 -4.02%Sentiment Portfolio 0.0234 0.0382 0.6106 0.5929 -15.59%Equal-Weight Portfolio 5.96E-05 0.0287 0.0021 0.0141 -17.89%CRIX 0.0008 0.0316 0.0268 0.0274 -22.64%Gold 0.0001 0.0090 0.0109 -0.0158 -3.38%Oil -0.0006 0.0258 -0.0239 -0.0336 -10.79%GSCI Index -0.0005 0.0139 -0.0325 -0.0484 -6.59%REITs 0.0002 0.0098 0.0189 -0.0144 -4.86%PE 0.0001 0.0087 0.0093 -0.0338 -5.00%BTC 0.0008 0.0390 0.0213 0.0134 -25.18%XRP 0.0008 0.0516 0.0157 0.0098 -19.58%DASH 0.0039 0.0796 0.0491 0.0451 -86.35%MAID 0.0026 0.0768 0.0333 0.0295 -37.40%DOGE 0.0008 0.0589 0.0130 0.0078 -27.52%XMR 0.0032 0.0840 0.0381 0.0344 -33.63%BTS -0.0007 0.0733 -0.0099 -0.0138 -29.33%BCN 0.0040 0.1214 0.0329 0.0303 -49.00%NXT -0.0017 0.0725 -0.0234 -0.0271 -36.36%LTC -0.0008 0.0578 -0.0130 -0.0180 -54.72%

Robustness Check I: Transaction Cost

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Whole Sample Period Before 2016 After 2016

Trading Cost (bps)

Raw Annualized

Return t-value

Raw Annualized

Return t-value

Raw Annualized

Return t-value

1 11.58 15.97 13.76 11.77 9.22 11.38

2 11.54 15.91 13.72 11.73 9.18 11.33

3 11.50 15.86 13.68 11.70 9.14 11.29

4 11.46 15.81 13.64 11.67 9.10 11.24

5 11.42 15.76 13.60 11.63 9.06 11.19

6 11.38 15.71 13.56 11.60 9.03 11.15

7 11.34 15.65 13.52 11.57 8.99 11.10

8 11.30 15.60 13.48 11.53 8.95 11.06

9 11.26 15.55 13.44 11.50 8.91 11.01

10 11.22 15.50 13.39 11.47 8.87 10.96

Robustness Check II: Sentiment Formation Period

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Whole Sample Period Before 2016 After 2016

Formation Period (day)

Raw Annualized

Return t-value

Raw Annualized

Return t-value

Raw Annualized

Return t-value

11 11.53 16.00 13.57 16.00 9.28 16.00

12 11.62 16.95 13.66 16.95 9.33 16.95

13 11.27 16.14 13.73 16.14 8.42 16.14

14 11.21 15.53 14.25 15.53 7.58 15.53

15 11.53 15.64 14.42 15.64 7.93 15.64

16 12.01 16.52 14.77 16.52 8.44 16.52

17 11.60 15.42 14.41 15.42 7.80 15.42

18 11.44 15.08 13.91 15.08 7.93 15.08

19 11.21 15.00 13.59 15.00 7.62 15.00

20 11.22 14.99 13.32 14.99 7.87 14.99

Conclusion

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Cryptocurrency: A New Investment Opportunity!