Faculty Of Business Administration and Economics

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Browsing Faculty Of Business Administration and Economics by Author "Assilian, Barkev Byram"

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    The Determinants of 10 Cryptocurrencies and Their Contribution to Portfolio Design
    (2021) Assilian, Barkev Byram
    During the last decade, cryptocurrencies and their promise to create a new decentralized financial system drew the attention of investors, companies, traders, speculators and researchers. The purpose of the study is to determine the macroeconomic and crypto-specific factors influencing the price of 10 well-known cryptocurrencies, which were introduced during or before 2017 all-time high of Bitcoin and were the first to present new ideas and applications to Bitcoin. The study tests the correlation between cryptocurrencies (Bitcoin, Ethereum, Bitcoin cash, Ethereum classic, Dash coin, Litecoin, Ripple, Monero, Stellar, and NEO), macroeconomic (Vanguard total stock ETF, WTI oil, Gold, COBE volatility index VIX, Dollar index) and cryptocurrency specific factors (Bitcoin dominance, Supply, number of transactions, Adjusted transaction volume, hash rate). To add, Bitcoin is the first and the largest cryptocurrency by market capitalization. In the second part of the study, the correlation between the other 9 cryptocurrencies and Bitcoin is tested. The final part of the study examines the benefits of constructing an equally weighted index of the 10 cryptocurrencies and using it as a diversifier to 6 traditionally diversified portfolios, which include the following assets (Vanguard total stock market ETF, Vanguard total bond market ETF, Vanguard real state ETF, Gold, OIL, Baltic dry index). Those portfolios target long-term investors who wish to buy and hold, and also generate a steady return with the least amount of risk. The factors that affect the price of the cryptocurrencies and their interaction with Bitcoin were studied and tested through descriptive and GARCH model analysis. The portfolios’ comparison was done using the following methods (Average return, Standard deviation, Sharpe ratio, information ratio, portfolio coefficient of variation, Maximum drawdown). The most significant macroeconomic factor was Vanguard total stock, which is significant to all cryptocurrencies, and gold was significant to 7 cryptocurrencies but not significant to Litecoin, Monero, and Dash. On the other hand, oil is not significant to any of the cryptocurrencies and Dollar index is significant to Ripple only. VIX is only linked to Bitcoin and Ripple. As for cryptocurrency specific factors, they show relatively low correlation for all cryptocurrencies. GARCH model showed significance for 6 cryptocurrencies except Ethereum Cash, Stellar, and Dash. Ethereum and litecoin were the two coins which showed the highest correlation to Bitcoin about 0.21% which is not high correlation. The low percentage correlation with different signs allow for diversification across the cryptocurrency market. All portfolios which included the cryptocurrency index had higher yearly return, and Sharpe ratio and higher information ratio, but had higher volatility compared to the portfolios without the index. However, portfolio coefficient of variation showed very good risk to return ratio; so, it shall be up to the investor to decide the allocation of the cryptocurrencies in the portfolio to get a better return taking into consideration their risk appetite.