The Diversification Benefits of Cryptocurrency Factor Portfolios: Are They There?

Research output: Working paper / PreprintWorking paper


We investigate the out-of-sample diversification benefits of cryptocurrencies from a generalized perspective, a cryptocurrency-factor level, with traditional and machine-learning-enhanced asset-allocation strategies. The cryptocurrency factor portfolios are formed in an analogous way to equity anomalies by using more than 2,000 cryptocurrencies. The findings indicate that a stock-bond portfolio incorporating size- and momentum-based cryptocurrency factors can achieve statistically significant out-of-sample diversification benefits for investors with different risk preferences. Additionally, machine-learning-enhanced asset-allocation strategies can boost the traditional approaches by enriching (shrinking) the distributions of weights allocated to potentially effective cryptocurrency factors. Our findings are robust to i) the inclusion of transaction costs, ii) an alternative benchmark portfolio, and iii) a rolling-window estimation scheme.
Original languageEnglish
Publication statusIn preparation - 30 Jan 2023


  • Cryptocurrency Factors
  • Portfolio Optimization
  • Diversification Benefits
  • Machine Learning

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)
  • Management Science and Operations Research


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