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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
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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
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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
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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/)
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Summary Statistics
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Correlation Analysis
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Static Correlation
Dynamic Conditional Correlation (DCC)
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Efficient Frontier and Transition Map
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(%)
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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)
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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%
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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
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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
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Conclusion
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Cryptocurrency: A New Investment Opportunity!