Cryptocurrency: A New Investment Opportunity? David Lee Kuo Chuen, - - PowerPoint PPT Presentation

Cryptocurrency: A New Investment Opportunity?

PRESENTED BY

CHERYL WANG YU YU RESEARCH FELLOW SINGAPORE UNIVERSITY OF SOCIAL SCIENCES 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

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Outline

 Cryptocurrency  Diversification Effects of Cryptocurrencies  Investor Sentiment and Portfolio

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From Centralization to Decentralization

Fiat Money

• High Transaction Fees
• Long Settlement Period

Centralized Digital Currency

• Loyalty points of companies or digital coins of

Internet-based platforms

• Centralized: Controlled and verified by the

institution 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-tokens were 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/

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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 cryptocurrenci es based on the frequency with which they are included in the CRIX (CRypto IndeX http://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 March 2017)

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 Volatility Sharpe 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!